Filed Pursuant to Rule 424(b)(3)
Registration No. 333-120659
PROSPECTUS
WESTSIDE ENERGY CORPORATION
4400 Post Oak Parkway, Suite 2530
Houston, Texas 77027
(713) 979-2660
14,924,585 Shares of Common Stock
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This prospectus relates to up to 14,924,585 shares of our common stock,
$0.01 par value per share, being offered by the persons who are our
stockholders. These persons are referred to throughout this prospectus as
"selling stockholders." Of these shares:
* 13,632,085 were previously issued to 55 stockholders, and
* 1,292,500 shares are issuable upon the exercise of certain
warrants issued to 16 holders (all but three of whom are also
included in the preceding group of stockholders)
All of the common shares and warrants described above (except any shares of
common stock which may be issued in the future upon the exercise of warrants)
were previously issued in private placement transactions.
The selling security holders may offer the shares covered by this
prospectus at fixed prices, at prevailing market prices at the time of sale, at
varying prices or negotiated prices, in negotiated transactions or in trading
markets for our common stock. We will not receive any cash proceeds from the
selling security holders' subsequent sales of the shares covered by this
prospectus. However, we will receive the exercise price of a warrant upon its
exercise.
Our common stock is listed and trades on the American Stock Exchange
under the symbol "WHT" The closing price of our common stock on the American
Stock Exchange on December 6, 2005 was $3.35 per share.
----------------------
You should consider carefully the Risk Factors beginning on page 6 of
this prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is December 20, 2005.
TABLE OF CONTENTS
SUMMARY INFORMATION...........................................................3
RECENT EVENTS ................................................................4
RISK FACTORS .................................................................6
USE OF PROCEEDS .............................................................16
DIVIDEND POLICY .............................................................16
PRICE RANGE OF COMMON STOCK .................................................16
BUSINESS ....................................................................17
MANAGEMENT ..................................................................28
EXECUTIVE COMPENSATION ......................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..............................31
PRINCIPAL STOCKHOLDERS ......................................................32
DESCRIPTION OF SECURITIES ...................................................34
SELLING STOCKHOLDERS ........................................................36
PLAN OF DISTRIBUTION ........................................................42
EXPERTS .....................................................................43
INDEX TO FINANCIAL STATEMENTS................................................44
2
SUMMARY INFORMATION
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including "Risk
Factors," before investing in our common stock.
Common stock outstanding 17,376,745 shares (1)
prior to this offering
Common stock being offered for Up to 14, 925,085 shares
resale to the public
Common stock outstanding
after this offering 18,669,245 shares (2)
Price per share to the public Market or negotiated price at the
time of sale or resale.
Total proceeds raised by offering We will not receive any proceeds from
the resale of shares offered by any
selling stockholders. We did receive
proceeds from the sale of our common
stock and warrants in private
placements. We will receive proceeds
from the exercise of the warrants
whose underlying shares of common
stock are covered by this prospectus.
These proceeds may equal as much as
$1,986,250 if all of the warrants are
exercised.
Use of proceeds For working capital and general
corporate purposes.
Plan of distribution The offering of our shares of common
stock is being made by our stockholders
who may wish to sell their shares.
Selling stockholders may sell the
shares covered by this prospectus in
the open market or in privately
negotiated transactions and at
discounted prices, fixed prices, or
negotiated prices.
Risk factors Significant risks are involved in
investing in our company. For a
discussion of risk factors you should
consider before buying our common
stock, see "RISK FACTORS" beginning on
page 6.
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(1) Does not include up to 1,292,500 shares issuable upon the exercise of
warrants whose underlying shares of common stock are covered by this
prospectus.
(2) Includes up to 1,292,500 shares issuable upon the exercise of warrants
whose underlying shares of common stock are covered by this prospectus.
3
RECENT EVENTS
Westside Energy Corporation, f/n/a "Eventemp Corporation" (the
"Company"), was incorporated on November 30, 1995 under the laws of the State of
Nevada. In February 2004, the Company decided to focus its efforts on the
acquisition of attractive crude oil and natural gas prospects, and the
exploration, development and production of oil and gas on these prospects. The
Company is focusing its efforts initially in the State of Texas. For several
years prior to February 2004, the Company had been dormant from a business
perspective. In connection with the change in the Company's business focus, the
Company has undertaken a number of activities. First, the Company changed its
corporate name to "Westside Energy Corporation" on March 17, 2004. Next, the
Company has improved its corporate governance in several ways including the
expansion of the Company's Board of Directors from one member to the current
number of five members, with three outside directors being elected, all of whom
have extensive oil and gas experience. (Subsequently, one of these outside
directors became an employee of the Company, thus losing his status as an
outside director; the Company is currently considering candidates to elect
another third outside director.) The Board of Directors has also created audit,
compensation and nominating committees on which only outside directors serve. In
addition to the creation of an audit committee, the Company has improved
internal controls over financial reporting by the addition of a Controller to
the Company's staff. The Board of Directors has also elected a new slate of
officers, including a Chief Executive Officer and a Chief Operating Officer,
both with considerable experience in the oil & gas industry. Operationally, the
Company acquired rights in a number of oil and gas leases. As of December 12,
2005, the Company had acquired total leased acreage of 68,044 gross acres and
63,584 net acres in various Texas counties in the Barnett Shale, including Jack,
Wise, Denton, Cooke, Montague, Hill, Ellis, Hamilton, Comanche and Mills
Counties. As of the date of this Prospectus, the Company has completed or
commenced work on a number of wells. For additional information regarding these
wells, see the table captioned "STATUS OF WELLS AS OF DECEMBER 12, 2005" in the
section captioned "BUSINESS - Plan of Operation - Recent Developments."
Moreover, the Company completed several rounds of financings, including the sale
of 10 million shares of the Company's common stock in a private placement
transaction resulting in gross proceeds of $20 million and net proceeds to the
Company of approximately $18.5 million after offering expenses. Furthermore, the
Company's common stock has been listed and is now traded on the American Stock
Exchange.
On November 30, 2005, the Company entered into an agreement
governing a proposed acquisition transaction that management believes will
significantly advance the Company's business. On November 30, 2005, the Company
entered into a purchase and sale agreement (the "Agreement") with Kelly K.
Buster, James I. Staley, Enexco, Inc., the Class B Limited Partners of EBS, and
EBS Oil & Gas Partners Production GP, LLC (separately a "Seller" and
collectively the "Sellers"), pursuant to which the Company agreed to purchase
from the Sellers, and the Sellers agreed to sell to the Company, all of the
outstanding equity interests (the "Equity Interests") in EBS Oil and Gas
Partners Production Company, L.P. ("EBS") and its affiliates. EBS is a privately
held entity engaged in the drilling and completion of wells on various oil and
gas leases covering lands located primarily in Cooke, Montague, and Wise
Counties, Texas. Upon closing, the effective time (the "Effective Time") of the
sale and purchase pursuant to the Agreement (the "Transaction") will be October
1, 2005.
EBS has represented to the Company that EBS owns rights in 8,736
gross acres, and has drilled and operates 27 wells located primarily in the
Barnett Shale. EBS also owns varying working interests in wells operated by
third parties. EBS has furnished the Company with a reserve report dated October
1, 2005 indicating that as of such date EBS had Total Proved reserves of
2,081,493 MCF of natural gas and 43,239 barrels of oil, with Proved Developed
Producing reserves of natural gas and oil constituting 53.5% and 34.8%,
respectively, of the Total Proved reserves of such hydrocarbons. EBS has
represented to the Company that Tri-County Gathering, a pipeline system operated
by Cimmarron Gathering, LLP, is the primary transporter of gas sold by EBS in
the Barnett Shale area, and that EBS owns approximately a one-sixth interest in
Cimmarron Gathering, LLP. This pipeline is comprised of approximately 14 miles
of gathering lines and three compression stations with approximately 2,500
horsepower of compression with pipeline capacity of approximately 20 million
cubic feet per day. EBS has ten employees, who will be employed by the Company
after the closing of the Transaction.
4
The purchase price for the Equity Interests consists of an initial
purchase price to be paid at closing (the "Initial Purchase Price") and
additional consideration to be paid after closing (the "Additional
Consideration"). The Initial Purchase Price is set at $9,804,839, and will
consist of the assumption or purchase of debt owed by EBS in the approximate
amount of $5.65 million (the "Partnership Debt"). (See the discussion set forth
hereinafter regarding the Company's purchase of certain outstanding Partnership
Debt contemporaneously with the execution of the Agreement.) The Initial
Purchase Price is subject to certain adjustments (believed to be customary)
based on the value of EBS's inventory of hydrocarbons at the Effective Time, the
value of all of EBS's unsold inventory of gas plant products at the Effective
Time, the value of all hydrocarbons sold by EBS after the Effective Time,
certain accrued taxes as of the Effective Time, the amount of any net working
capital deficit as of the Effective Time, and certain other matters. The Initial
Purchase Price, less the amount of the Partnership Debt and the preceding
adjustments, will be paid in cash at closing.
The amount of Additional Consideration will be based on certain EBS
wells (the "CVR Wells") that are in various stages of development as of the date
of the Agreement but that did not have production sustained for a sufficient
period of time to permit a third party engineering report to establish proved
reserves. The amount of Additional Consideration will depend upon the amount of
"Proved Reserves" (as such term is used in the definitions promulgated by the
Society of Petroleum Evaluation Engineers and the World Petroleum Congress) that
the CVR Wells are determined to have after the closing of the Transaction. The
determination of the amount of the Additional Consideration will take place on
several occasions after the closing of the Transaction.
The Agreement contains representations, warranties, indemnifications
and other agreements believed by the Company to be customary for transactions
such as the one provided for by the Agreement. The consummation of the
Transaction is subject to a number of customary conditions, including, without
limitation, that the Company has secured acquisition financing satisfactory to
it in its sole discretion, all representations and warranties remain true and
correct, all pre-closing agreements have been performed, all required approvals
and consents of the Transaction have been obtained, no lawsuit seeking to enjoin
the Transaction has been instituted, all ancillary documents have been executed,
and Sellers have prepared and delivered certain audited financial statements
regarding EBS. There can be no assurance that the Transaction will be completed
and that the Company will thus acquire the business of EBS.
In connection with the execution of the Agreement, the Company
purchased from a group of private investors their rights as lenders in certain
outstanding Partnership Debt (referred to hereinafter as the "Purchased
Partnership Debt) owed by EBS to such group. The outstanding balance of, and the
purchase price paid by the Company for, the Purchased Partnership Debt was $3.85
million. The Purchased Partnership Debt is secured by liens on and security
interests in substantially all of EBS's assets. In connection with its purchase,
the Company received an assignment of these liens and security interests. These
liens and security interests represent a senior secured position, but the
Company will share this lien position with another EBS creditor. The Purchased
Partnership Debt accrues interest at the rate of 12% per annum, and will become
due and payable in 60 days.
5
RISK FACTORS
The securities covered by this prospectus involve a high degree of
risk. Accordingly, they should be considered extremely speculative. You should
read the entire prospectus and carefully consider, among the other factors and
financial data described herein, the following risk factors:
Risks Related to our Company
OUR EXTREMELY LIMITED HISTORY MAKES AN EVALUATION OF US AND OUR FUTURE
EXTREMELY DIFFICULT, AND PROFITS ARE NOT ASSURED.
The Company was incorporated on November 30, 1995 for the purpose of
commercially exploiting a proprietary self-contained climate control system for
vehicles (known as the Etemp system) that allowed the user to call his or her
vehicle from any available telephone and pre-cool or pre-heat the interior of
the vehicle, within five minutes before arriving, with the engine turned off.
During February 2004, we decided to focus our business on the acquisition of
attractive crude oil and natural gas prospects, and the exploration, development
and production of oil and gas on these prospects. Since that time, we have
acquired rights in oil and gas properties and undertaken certain exploratory and
other activities. See "RECENT EVENTS" above. However, we do not have a long
operating history in our current business. Nearly all of the oil and gas
properties that we have leased to date are considered "undeveloped acreage,"
which the U.S. Securities and Exchange Commission (the "Commission") defines as
"lease acreage on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and gas regardless
of whether such acreage contains proved reserves." We have established a limited
volume of proved reserves with regard to our properties. In view of our
extremely limited history in the oil and gas business, you may have difficulty
in evaluating us and our business and prospects. You must consider our business
and prospects in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. For our business
plan to succeed, we must successfully undertake most of the following
activities:
* Find and acquire rights in attractive oil and gas properties;
* Drill successful exploratory test wells on our oil and gas
properties to establish the presence of oil and gas in
commercially viable quantities;
* Develop our oil and gas properties, including the successful
application of advanced formation fracturing technologies and
procedures, to a stage at which oil and gas are being produced
in commercially viable quantities;
* Contract with purchasers of our commercial production of oil
and gas;
* Maintain access to funds to pursue our capital-intensive
business plan;
* Comply with all applicable laws and regulations;
* Identify and enter into binding agreements with suitable joint
venture partners for our future projects;
* Implement and successfully execute our business strategy;
* Respond to competitive developments and market changes; and
* Attract, retain and motivate qualified personnel.
There can be no assurance that we will be successful in undertaking such
activities. Our failure to undertake successfully most of the activities
described above could materially and adversely affect our business, prospects,
financial condition and results of operations. In addition, there can be no
assurance that our exploration and production activities will produce oil and
gas in commercially viable quantities, if any at all. Moreover, even if we
succeed in producing oil and gas, we expect to incur operating losses until such
time (if ever) as we consistently produce and sell sufficient volumes of our
commercial production to cover direct production costs as well as corporate
overhead. There can be no assurance that sales of our oil and gas production
will ever generate significant revenues, that we will ever generate positive
cash flow from our operations or that (if ever attained) we will be able to
sustain profitability in any future period.
6
WE MAY NEED TO PROCURE ADDITIONAL FINANCING TO PURSUE OUR BUSINESS PLAN
IN FISCAL 2006 IN THE MANNER THAT WE PREFER, AND THE PROCUREMENT OF DESIRED
FINANCING IS UNCERTAIN.
We have sufficient funds to pursue our business plan for the remainder
of fiscal 2005 and into part of fiscal 2006. However, as of December 12, 2005,
we have formulated a preliminary business plan for fiscal 2006 that has not been
submitted to or approved by the Company's Board of Directors. The Company would
be required to procure additional financing in order to pursue the preliminary
plan, which involves significant capital expenditures for the exploration,
development, and production of oil and gas reserves. (Moreover, we will be
required to obtain additional financing to close the acquisition of all of the
outstanding equity interests (the "Equity Interests") in EBS Oil and Gas
Partners Production Company, L.P. and its affiliates, as discussed hereinabove
and immediately below.) Our current flow of revenues is not expected to be
sufficient to finance the preliminary plan or the EBS acquisition. We are
currently identifying sources of capital. However, there can be no assurance
that we will find such sources. If required financing is not available on
acceptable terms, we would be prevented from pursing the preliminary plan for
fiscal 2006 and the EBS acquisition. In such event, we would be constrained to
pursue a less ambitious plan, which could materially and adversely affect our
business and financial condition. In addition, if required financing is not
available on acceptable terms, we would be prevented from acquiring the Equity
Interests. Moreover, any debt financing undertaken to procure funds may involve
restrictions limiting our operating flexibility. If we obtain funds through the
issuance of equity securities, the following results will or may occur:
* The percentage ownership of our existing stockholders will be
reduced;
* Our stockholders may experience additional dilution in net
book value per share; and/or
* The new equity securities may have rights, preferences or privileges
senior to those of the holders of our Common Stock.
Finally, if our revenues or borrowing base decrease as a result of lower oil and
gas prices or operating difficulties, we may have a limited ability to expend
the capital necessary to undertake or complete future drilling programs. Our
future liquidity will depend upon numerous factors, including the success of our
exploration and production efforts and our capital raising activities. See
"BUSINESS - Plan of Operation - Capital Requirements."
THE ACQUISITION OF EBS COULD EXPOSE US TO NUMEROUS RISKS.
On November 30, 2005, we entered into an agreement pursuant to which we
agreed to purchase all of the outstanding equity interests (the "Equity
Interests") in EBS Oil and Gas Partners Production Company, L.P. ("EBS") and its
affiliates. EBS is a privately held entity engaged in the drilling and
completion of wells on various oil and gas leases covering lands located
primarily in Cooke, Montague, and Wise Counties, Texas. The acquisition of the
Equity Interests and the business of EBS would be accompanied by the risks
commonly encountered in a transaction of this nature. Such risks include the
following:
* Difficulty of assimilating the operations and personnel of EBS;
* Potential disruption of our ongoing business:
* Inability of management to maximize our financial and strategic
position through the successful incorporation of EBS:
* Additional expenses associated with amortization of acquired
intangible assets:
* Maintenance of uniform standards, controls, procedures and policies:
* Increased general and administrative expenses;
* Impairment of relationships with employees, customers, vendors
and advertisers as a result of any integration of new management
personnel: and
* Potential unknown liabilities associated with EBS's business
7
There can be no assurance that we would be successful in overcoming these risks
or any other problems encountered in connection with the acquisition of the
Equity Interests and the business of EBS. Due to all of the foregoing, the
acquisition of the Equity Interests and the business of EBS may materially and
adversely affect our business, results of operations, financial condition and
cash flows. We will be required to obtain additional financing to close the
acquisition of the Equity Interests and the business of EBS. There can be no
assurance that such financing will be available on acceptable terms. In
addition, if we issue stock to complete the acquisition of the Equity Interests
and the business of EBS as we expect to do, existing stockholders will
experience ownership dilution.
WE DEPEND ON CERTAIN KEY PERSONNEL.
We substantially depend upon the efforts and skills of our current
management. The loss of the services of one or more members of our current
management, or the inability of one or more of them to devote sufficient
attention to our operations, could materially and adversely affect our
operations. We have not entered into a written employment agreement with Jimmy
D. Wright, our Chief Executive Officer. As a result, Mr. Wright may discontinue
providing his services to us at any time and for any reason, and even thereafter
commence competition with us. Moreover, we do not maintain key man life
insurance on any member of management, and we have not required any member of
management to enter into any covenant or agreement not to compete with us.
OUR CURRENT MANAGEMENT RESOURCES MAY NOT BE SUFFICIENT FOR THE FUTURE,
AND WE HAVE NO ASSURANCE THAT WE CAN ATTRACT ADDITIONAL QUALIFIED PERSONNEL.
There can be no assurance that the current level of management is
sufficient to perform all responsibilities necessary or beneficial for
management to perform. Our success in attracting additional qualified personnel
will depend on many factors, including our ability to provide them with
competitive compensation arrangements, equity participation and other benefits.
There is no assurance that (if we need to) we will be successful in attracting
highly qualified individuals in key management positions.
LIMITATIONS ON CLAIMS AGAINST OUR OFFICERS AND DIRECTORS, AND OUR
OBLIGATION TO INDEMNIFY THEM, COULD PREVENT OUR RECOVERY FOR LOSSES CAUSED BY
THEM.
The corporation law of Nevada allows a Nevada corporation to limit the
liability of its directors to the corporation and its stockholders to a certain
extent, and our Restated Articles of Incorporation have eliminated our
directors' liability to the maximum extent permitted by the corporation law of
Nevada. Moreover, our Bylaws provide that we must indemnify each director,
officer, agent and/or employee to the maximum extent provided for by the
corporation law of Nevada. Further, we may purchase and maintain insurance on
behalf of any such persons whether or not we have the power to indemnify such
person against the liability insured against. Consequently, because of the
actions or omissions of officers, directors, agents and employees, we could
incur substantial losses and be prevented from recovering such losses from such
persons. Further, the Commission maintains that indemnification for liabilities
arising under the Securities Act is against the public policy expressed in the
Securities Act, and is therefore unenforceable.
INCUMBENT MANAGEMENT OWNS A LARGE PERCENTAGE OF OUR OUTSTANDING STOCK,
AND CUMULATIVE VOTING IS NOT AVAILABLE TO STOCKHOLDERS.
Our current management currently owns (directly or indirectly)
approximately 31.9% of our outstanding common stock (considered on an undiluted
basis). Management's stock ownership would increase if they were to exercise
certain outstanding warrants issued to them directly or indirectly. Cumulative
voting in the election of directors is expressly denied in our Restated Articles
of Incorporation. Accordingly, the holder or holders of a majority of our
outstanding shares of common stock may elect all of our directors. Management's
large percentage ownership of our outstanding common stock helps enable them to
maintain their positions as such and thus control of our business and affairs.
Moreover, two of our directors, Jimmy D. Wright and Keith D. Spickelmier have
entered into a Voting Agreement, pursuant to which they agreed until February
26, 2006 to vote all of their shares of common stock to elect themselves or
their nominees to the Company's Board of Directors. This Voting Agreement could
further entrench current management during the term of its existence.
8
WE MAY EXPERIENCE RAPID GROWTH, AND IN SUCH CASE WE WILL NEED TO MANAGE
THIS GROWTH EFFECTIVELY.
We believe that, given the right business opportunities, we may expand
our operations rapidly and significantly. If rapid growth were to occur, it
could place a significant strain on our management, operational and financial
resources. To manage any significant growth of our operations, we will be
required to undertake the following successfully:
* Manage relationships with various strategic partners and other third
parties;
* Hire and retain skilled personnel necessary to support our business;
* Train and manage a growing employee base;
* Continually develop our financial and information management systems;
and
* Raise any required capital.
If we fail to make adequate allowances for the costs and risks associated with
this expansion or if our systems, procedures or controls are not adequate to
support our operations, our business could be harmed. Our inability to manage
growth effectively could materially and adversely affect our business, results
of operations and financial condition.
WE HAVE ENTERED INTO CERTAIN TRANSACTIONS WITH PERSONS WHO ARE OUR
OFFICERS AND DIRECTORS.
We have entered into certain transactions (the "Related Party
Transactions") either directly with, or with entities controlled by one or both
of, Jimmy D. Wright, one of our directors and our President and Chief Financial
Officer, and Keith D. Spickelmier, one of our directors and our Chairman of the
Board. The Related Party Transactions are described in "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS." Some of the Related Party Transactions were not the
result of arms-length negotiations. Accordingly, there can be no assurance that
the terms and conditions of the Related Party Transactions are as favorable to
us as those that could have been obtained in true arms-length negotiations.
However, we believe that all Related Party Transactions were fair as to the
Company at the time they were authorized or approved and therefore are valid
under applicable Nevada law. Moreover, because of Messrs. Wright's and
Spickelmier's positions with us, there can be no assurance that we would enforce
a claim against either of them arising out of any of the Related Party
Transactions.
Risks Related to our Business
OIL AND GAS PRICES ARE VOLATILE, HAVE BEEN LOW IN RECENT YEARS, AND
COULD BE LOW AGAIN IN THE FUTURE.
Our revenues, profitability and future growth and the carrying value of
our properties will depend substantially on the prices we realize for our oil
and gas production. Our realized prices will also affect the amount of cash flow
available for capital expenditures and our ability to borrow and raise
additional capital. Oil and gas are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand. Historically, the markets for oil and gas have been volatile, and
they are likely to continue to be volatile in the future. Starting from a level
below $4.00/MCF at the end of 2002, natural gas prices experienced a steady
climb to over $8.00/MCF by July 2005. Natural gas prices have increased
substantially over the last several months, reaching levels in excess of
$14.00/MCF. Oil prices have also increased over the last several years, rising
from less than $30.00/BBL in 2003 to over $60.00/BBL in 2005. The increases in
oil and natural gas prices since 2002 have been characterized by occasional, but
not sustained, price declines. Despite the historically high nominal prices for
natural gas and oil, there can be no assurance that significantly lower prices
will not be experienced again in the future. Among the factors that can cause
price volatility are:
9
* worldwide or regional demand for energy, which is affected by
economic conditions;
* the domestic and foreign supply of oil and gas;
* weather conditions;
* domestic and foreign governmental regulations;
* political conditions in gas or oil producing regions;
* the ability of members of the Organization of Petroleum Exporting
Countries to agree upon and maintain oil prices and production
levels; and
* the price and availability of alternative fuels.
Oil and gas price movements cannot be predicted with certainty. Lower oil and
gas prices may not only decrease our revenues on a per unit basis but also may
reduce the amount of oil and gas that we can produce economically. A substantial
or extended decline in oil and gas prices may materially and adversely affect
our future business, financial condition, results of operations, liquidity and
ability to finance capital expenditures.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO SELECT OIL AND
GAS PROJECTS THAT ULTIMATELY PROVE SUCCESSFUL ECONOMICALLY.
We intend to drill exploratory test wells on properties with no proved
oil and gas reserves, although such properties will typically be situated in
areas of proved reserves. Drilling of oil and gas wells always involves the risk
that no commercially productive oil or gas reservoirs will be encountered. While
all drilling (whether developmental or exploratory) involves this risk,
exploratory drilling involves greater risks of dry holes or failure to find
commercial quantities of oil and gas. Because of our proposed exploratory
drilling activities, we are especially likely to experience exploration and
abandonment expenses from time to time in the future. The economic success of
any project will depend on a number of factors, including our ability to discern
and estimate the volumes of recoverable reserves relating to the project, rates
of future production, future commodity prices, operating costs, and possible
environmental liabilities. All of these factors affect whether or not a project
will ultimately generate cash flows sufficient to provide a suitable return on
investment. Our assessments and estimations of these factors (which are
inherently inexact and uncertain) may prove inaccurate. Moreover, there is no
specific criterion for selecting the oil and gas projects that we will decide to
pursue. Accordingly, we will have significant flexibility in selecting such
projects. There can be no assurance that we will be able to identify
economically successful oil and gas projects or that we will be able to pursue
these projects successfully even if identified. Our failure to select
economically successful oil and gas projects will materially and adversely
affect our business, results of operations and financial condition. Even if we
create reserves through our exploration activities, our reserves will decline as
they are produced. We will be constantly challenged to add new reserves through
further exploration or further development of our existing properties. There can
be no assurance that our exploration and development activities will be
successful in adding new reserves. If we fail to replace reserves, our level of
production and cash flows will be adversely impacted.
THE SELECTION OF OIL AND GAS PROJECTS INVOLVES NUMEROUS RISKS UNRELATED
TO THE PRESENCE OR ABSENCE OF RECOVERABLE RESERVES RELATING TO THE PROJECT.
Even though we intend to perform a review (that we believe is
consistent with industry practices) of each project we decide to pursue, reviews
of this nature are often limited in scope. Moreover, these reviews may not
reveal all existing or potential problems nor will they permit us to become
sufficiently familiar with the related properties to fully assess their
deficiencies and capabilities. In addition, inspections may not always be
performed on every platform or well, and structural or environmental problems
may not be observable even when an inspection is undertaken. Even when problems
are identified, the seller or lessor may be unwilling or unable to provide
effective contractual protection against all or part of the problems. We are
generally not entitled to contractual indemnification for environmental
liabilities, and we may be required to pursue many projects on an "as is" basis.
Accordingly, we may be required to make significant expenditures to cure
environmental contamination relating to acquired properties. If we are unable to
remedy or cure any title defect or potential environmental problem of a nature
such that drilling operations on the property would not be prudent, we could
suffer a loss of our entire investment in the property.
10
WE ARE CURRENTLY FOCUSING OUR OPERATIONAL EFFORTS IN ONLY ONE
GEOGRAPHICAL AREA, AND OUR CURRENT LACK OF GREATER DIVERSIFICATION ENTAILS
CONSIDERABLE RISKS.
Currently, all of our oil and gas interests lie in the Barnett Shale
located in the State of Texas, although we may in the future own or lease
properties and operate in areas other than the Barnett Shale. At the present,
our success depends entirely upon our ability to locate and produce oil and gas
on a profitable basis on and from our interests in the Barnett Shale. There can
be no assurance that we will be able to do this, and that we will not encounter
one or more problems arising from the particular geological characteristics of
the Barnett Shale. Our current lack of diversification beyond the Barnett Shale
may make our results of operations more volatile than they would be if we were
seeking to develop interests in more than one area. For more information about
the Barnett Shale, see "BUSINESS - Plan of Operation - Initial Activities."
OUR APPROACH TO TITLE ASSURANCE COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS AND OPERATIONS.
We intend to purchase working and revenue interests in oil and gas
leasehold interests. The existence of a material title deficiency can render a
lease worthless and can result in a large expense to our business. In some
instances, we may forego the expense of retaining lawyers to examine the title
to the mineral interest to be placed under lease or already placed under lease.
Rather, we will rely upon the judgment of oil and gas lease brokers or landmen
who perform the field work in examining records in the appropriate government
office before attempting to place under lease a specific mineral interest. This
is customary practice in the oil and gas industry. Prior to the drilling of an
oil or gas well, however, it is the normal practice in the oil and gas industry
for the person or company acting as the operator of the well to obtain a
preliminary title review of the spacing unit within which the proposed oil or
gas well is to be drilled to ensure there are no obvious deficiencies in title
to the well. In some instances, we, or the person or company acting as operator
of the wells located on the properties that we intend to lease, may not obtain
counsel to examine title to such spacing unit until the well is about to be
drilled. As a result of such examinations, certain curative work may need to be
performed to correct deficiencies in the marketability of the title, and such
curative work will entail additional expense. The work might include obtaining
affidavits of heirship or causing an estate to be administered. Occasionally,
the examination made by the title lawyers reveals that the oil and gas lease or
leases are worthless, having been purchased in error from a person who is not
the owner of the mineral interest desired. In such instances, the amount paid
for such oil and gas lease or leases is generally lost. If we were to lose the
amount paid for any such oil and gas lease, such loss could materially and
adversely affect our business. Since we do not intend to retain title lawyers in
connection with our acquisitions, the risk of such losses in our operations is
increased. We note, however, that we did obtain a drill site title opinion for
the tract of land on which our initial operated wells are being drilled.
DEVELOPMENT ACTIVITIES ON EVEN WELL-SELECTED PROJECTS MAY BE
UNSUCCESSFUL FOR MANY REASONS, INCLUDING WEATHER, COST OVERRUNS, EQUIPMENT
SHORTAGES AND MECHANICAL DIFFICULTIES.
The selection of attractive oil and gas projects does not ensure
success. The development of oil and gas projects involves a variety of operating
risks, including:
* fires;
* explosions;
* blow-outs and surface cratering;
* uncontrollable flows of natural gas, oil and formation water;
* natural disasters, such as hurricanes and other adverse
weather conditions;
* pipe, cement, subsea well or pipeline failures;
* casing collapses;
* ineffective hydraulic fracs;
* embedded oil field drilling and service tools;
* abnormally pressured formations; and
* environmental hazards, such as natural gas leaks, oil spills,
pipeline ruptures and discharges of toxic gases.
11
If we experience any of these problems, it could affect well bores, platforms,
gathering systems and processing facilities, which could adversely affect our
ability to conduct operations.
We could also incur substantial losses as a result of:
* injury or loss of life;
* severe damage to and destruction of property, natural
resources and equipment;
* pollution and other environmental damage;
* clean-up responsibilities;
* regulatory investigations and penalties;
* suspension of our operations; and
* repairs to resume operations.
These conditions can cause substantial damage to facilities, interrupt
production and reduce proved reserves. As a result, we could incur substantial
liabilities that could reduce or eliminate the funds available for development
or property acquisitions, or result in loss of equipment and properties.
Presently, because of budget constraints, we do not maintain insurance
in accordance with prevailing industry practices, but instead we rely upon the
insurance coverage of our operators to protect us against the types of risks,
losses and liabilities that customarily arise out of oil and gas exploration and
production activities. Our operators' insurance may prove inadequate.. Our lack
of customary insurance coverage may expose us to certain risks, losses and
liabilities for the indefinite future. If we ever decide to operate our own
wells, we intend to broaden our insurance coverage. However, we may never obtain
insurance for some risks if we believe the cost of available insurance is
excessive relative to the risks presented. In addition, some risks may not be
fully insurable if insurable at all. Even if we broaden our insurance coverage,
our insurance would probably not cover all potential claims or may not
adequately indemnify us for all liabilities to which we will be exposed. Any
liability or legal defense expenses not covered by insurance or exceeding our
insurance coverage could materially and adversely affect our business, operating
results and financial condition. Moreover, we do not currently carry business
interruption insurance.
Finally, the successful drilling of an oil or gas well does not ensure
a profit on investment. A variety of factors, both geological and
market-related, can cause a well to become uneconomical or only marginally
economic.
WE WILL RELY ON A NUMBER OF THIRD PARTIES, AND SUCH RELIANCE EXPOSES US
TO A NUMBER OF RISKS.
Our operations will depend on a number of third parties. We will have
limited control over these third parties. We will probably not have long-term
agreements with many of them. We may rely upon various companies to assist us in
identifying desirable gas and oil prospects to acquire and provide us with
technical assistance and services. We also may rely upon the services of
geologists, geophysicists, chemists, engineers and other scientists to explore
and analyze our prospects to determine a method in which the prospects may be
developed in a cost-effective manner. In addition, we intend to rely upon the
owners and operators of oil rigs and drilling equipment, and upon providers of
oilfield services, to drill and develop our prospects to production. Moreover,
if any of our wells proves to hold commercially producible gas, we will have to
rely on third party gathering or pipeline facilities to transport and purchase
our production. Overall, our inability to maintain satisfactory relationships
with the requisite third parties on acceptable commercial terms, or the failure
of such third parties to maintain the quality of services they provide at a
satisfactory standard, could materially and adversely affect our business,
results of operations and financial condition.
12
THE UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL
AND OILFIELD SERVICES COULD MATERIALLY AND ADVERSELY AFFECT US.
Either shortages or increases in the cost of drilling rigs, equipment,
supplies or personnel could delay or adversely affect our operations, which
could materially and adversely affect our business, financial condition and
results of operations. Drilling activity in the area of our proposed initial
activities is extremely high. Increased drilling activity could decrease the
availability of rigs and oilfield services. As a further result of the increased
drilling activity, associated costs (including those related to drilling rigs,
equipment, supplies and personnel and the services and products of other vendors
to the industry) could increase as well. These costs may increase further, and
necessary equipment and services may not be available to us at economical
prices.
WE MAY INCUR SUBSTANTIAL IMPAIRMENT WRITEDOWNS IN THE FUTURE.
For properties on which we establish proved oil and gas reserves, we
will review such properties for impairment when circumstances suggest there is a
need for such a review. For each property determined to be impaired, we will
recognize an impairment loss equal to the difference between the carrying value
and the fair value of the property on our balance sheet. Fair value is estimated
to be the present value of expected future net cash flows computed by applying
estimated future oil and gas prices (as determined by management) to the
estimated future production of oil and gas reserves over the economic life of a
property. Future cash flows are based upon an independent engineer's estimate of
proved reserves. In addition, other factors such as probable and possible
reserves are taken into consideration when justified by economic conditions and
actual or planned drilling. If oil and gas prices decrease or if the recoverable
reserves on a property are revised downward, we may be required to record
impairment writedowns, which would result in a negative impact to our financial
position.
OUR HEDGING DECISIONS MAY IMPACT OUR POTENTIAL GAINS FROM CHANGES IN
COMMODITY PRICES AND MAY RESULT IN LOSSES.
To reduce our exposure to fluctuations in the prices of oil and gas, we
may enter into hedging arrangements with respect to a portion of our expected
production. Hedging arrangements expose us to risk of financial loss in some
circumstances, including the following:
* production is less than expected;
* the other party to the hedging contract defaults on its
contract obligations;
* we could be required to post additional cash to cover margin
requirements, which could materially and adversely affect
our liquidity;
* we could be unable to meet additional margin requirements,
which could result in the closing of our positions thereby
leading to a financial loss as well as the possible loss of
the anticipated benefits of the related hedging transactions;
and
* there is a change in the expected differential between the
underlying price in the hedging agreement and actual prices
received.
These hedging arrangements may limit the benefit we would receive from
increases in the prices for oil and gas. Furthermore, if we choose not to engage
in hedging arrangements, we may be more adversely affected by changes in oil and
gas prices than had we engaged in hedging arrangements.
WE ARE SUBJECT TO COMPLEX LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL
REGULATIONS, WHICH CAN ADVERSELY AFFECT THE COST, MANNER OR FEASIBILITY OF DOING
BUSINESS.
Development, production and sale of oil and gas are subject to
extensive laws and regulations, including environmental laws and regulations. We
may be required to make large expenditures to comply with environmental and
other government regulations. Matters subject to regulation include:
* discharge permits for drilling operations;
* bonds for ownership, development and production of oil and gas
properties;
* reports concerning operations; and
* taxation.
Under these laws and regulations, we could be liable for personal
injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages. Failure to
comply with these laws and regulations also may result in the suspension or
termination of our operations and subject us to administrative, civil and
criminal penalties. Moreover, these laws and regulations could change in ways
that substantially increase our costs. Accordingly, any of these liabilities,
penalties, suspensions, terminations or regulatory changes could materially and
adversely affect our financial condition and results of operations.
13
OUR COMPETITORS MAY HAVE GREATER RESOURCES, WHICH COULD ENABLE THEM TO
PAY A HIGHER PRICE FOR PROPERTIES AND TO BETTER WITHSTAND PERIODS OF LOW MARKET
PRICES FOR OIL AND NATURAL GAS.
The petroleum and natural gas industry is intensely competitive, and we
compete with other companies that have substantially larger financial resources,
operations, staffs and facilities. Many of these companies not only explore for
and produce crude oil and natural gas but also carry on refining operations and
market oil and other products on a regional, national or worldwide basis. Such
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects or define, evaluate, bid for and purchase a greater
number of properties and prospects than our financial or human resources permit.
In addition, such companies may have a greater ability to continue exploration
activities during periods of low hydrocarbon market prices. Our ability to
acquire additional properties and to discover reserves in the future will be
dependent upon our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. For more
information regarding the competition to which we will be exposed, see "BUSINESS
- - Competition."
Risks Related to our Common Stock
OUR AUTHORIZED PREFERRED STOCK EXPOSES HOLDERS OF OUR COMMON STOCK TO
CERTAIN RISKS.
Our Restated Articles of Incorporation, as amended, authorize the
issuance of up to 10,000,000 shares of preferred stock, par value $.01 per
share. The authorized but unissued preferred stock constitutes what is commonly
referred to as "blank check" preferred stock. This type of preferred stock may
be issued by the Board of Directors from time to time on any number of
occasions, without stockholder approval, as one or more separate series of
shares comprised of any number of the authorized but unissued shares of
preferred stock, designated by resolution of the Board of Directors stating the
name and number of shares of each series and setting forth separately for such
series the relative rights, privileges and preferences thereof, including, if
any, the: (i) rate of dividends payable thereon; (ii) price, terms and
conditions of redemption; (iii) voluntary and involuntary liquidation
preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v)
terms of conversion to common stock, including conversion price, and (vi) voting
rights. Such preferred stock may provide our Board of Directors the ability to
hinder or discourage any attempt to gain control of us by a merger, tender offer
at a control premium price, proxy contest or otherwise. Consequently, the
preferred stock could entrench our management. The market price of our common
stock could be depressed to some extent by the existence of the preferred stock.
As of the date of this Prospectus, no shares of preferred stock had been issued.
WE HAVE CERTAIN OBLIGATIONS AND THE GENERAL ABILITY TO ISSUE ADDITIONAL
SHARES OF COMMON STOCK IN THE FUTURE, AND SUCH FUTURE ISSUANCES MAY DEPRESS THE
PRICE OF OUR COMMON STOCK.
We have various obligations and the ability to issue additional shares
of common stock in the future. These obligations and abilities include
outstanding warrants to purchase approximately 1,292,500 registered shares of
common stock as of December 6, 2005. These warrants permit the holders to
purchase shares of common stock at specified prices. These purchase prices may
be less than the then current market price of our common stock. Any shares of
common stock issued pursuant to these warrants would further dilute the
percentage ownership of existing stockholders. The terms on which we could
obtain additional capital during the life of these warrants may be adversely
affected because of such potential dilution. Finally, we may issue additional
shares in the future other than as listed above. There are no preemptive rights
in connection with our common stock. Thus, the percentage ownership of existing
stockholders may be diluted if we issue additional shares in the future. For
issuances of shares and grants of options to consultants, our Board of Directors
will determine the timing and size of the issuances and grants and the
consideration or services required therefor. Our Board of Directors intends to
use its reasonable business judgment to fulfill its fiduciary obligations to our
then existing stockholders in connection with any such issuance or grant.
Nonetheless, future issuances of additional shares could cause immediate and
substantial dilution to the net tangible book value of shares of common stock
issued and outstanding immediately before such transaction. Any future decrease
in the net tangible book value of such issued and outstanding shares could
materially and adversely affect the market value of the shares. Without any
limitation on the preceding, if we close the acquisition of all of the
outstanding equity interests in EBS Oil and Gas Partners Production Company,
L.P. ("EBS") and its affiliates as discussed herein, we expect to issue a
substantial (though currently indeterminable) number of shares as additional
consideration based on reserves subsequently established with respect to certain
EBS wells that are in various stages of development as of December 12, 2005 but
that did not have production sustained for a sufficient period of time to permit
a third party engineering report to establish proved reserves.
14
SALES OF LARGE QUANTITIES OF OUR COMMON STOCK COULD REDUCE THE PRICE OF
OUR COMMON STOCK.
Any sales of large quantities of shares of our common stock could
reduce the price of our common stock. In January 2005, we registered the sale by
stockholders of 17,772,077 shares of our common stock. The holders of these
shares may offer to sell such shares at any price and at any time determined by
them without limitation. If holders sell large quantities of shares of our
common stock, our common stock price may decrease and the public market for our
common stock may otherwise be adversely affected because of the additional
shares available in the market.
OUR COMMON STOCK HAS EXPERIENCED LIMITED TRADING.
Since June 20, 2005, our common stock has been listed and traded on the
American Stock Exchange. Prior to that time, our common stock was traded in the
over-the-counter market on the OTC Electronic Bulletin Board. The volume of
trading in our common stock has been fairly light, and the prices at which our
common stock has traded have fluctuated fairly widely on a percentage basis.
There can be no assurance as to the prices at which our common stock will trade
in the future. Until shares of our common stock become more broadly held and
orderly markets develop and even thereafter, the price of our common stock may
fluctuate significantly. The price for our common stock will be determined in
the marketplace and may be influenced by many factors, including the following:
* The depth and liquidity of the markets for our common stock;
* Investor perception of us and the industry in which we
participate;
* General economic and market conditions;
* Responses to quarter-to-quarter variations in operating
results;
* Failure to meet securities analysts' estimates;
* Changes in financial estimates by securities analysts;
* Conditions, trends or announcements in the oil and gas
industry;
* Announcements of significant acquisitions, strategic
alliances, joint ventures or capital commitments by us or our
competitors;
* Additions or departures of key personnel;
* Sales of our common stock;
* Accounting pronouncements or changes in accounting rules that
affect our financial statements; and
* Other factors and events beyond our control.
The market price of our common stock could experience significant
fluctuations unrelated to our operating performance. As a result, a stockholder
(due to personal circumstances) may be required to sell such stockholder's
shares of our common stock at a time when our stock price is depressed due to
random fluctuations, possibly based on factors beyond our control.
THE MARKET PRICE OF OUR COMMON STOCK HAS RISEN SIGNIFICANTLY IN A VERY
SHORT PERIOD OF TIME.
The market price of our common stock increased from a last reported
sale of approximately $.01 per share in March 2004 to up to an intra-day high of
$5.75 per share on March 11, 2005. There can be no assurance that the market
price of our common stock will remain at or near its current level.
15
THE TRADING PRICE OF OUR COMMON STOCK MAY ENTAIL ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.
The trading price of our common stock historically has been below $5.00
per share. As a result of this price level, trading in our common stock is
subject to the requirements of certain "penny stock" rules promulgated under the
Exchange Act. These rules require additional disclosure by broker-dealers in
connection with any trades generally involving any non-NASDAQ equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Such rules require the delivery, before any penny stock transaction,
of a disclosure schedule explaining the penny stock market and the risks
associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must determine the suitability of the penny
stock for the purchaser and receive the purchaser's written consent to the
transaction before sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
our common stock. As a consequence, the market liquidity of our common stock
could be severely affected or limited by these regulatory requirements.
BECAUSE OUR BOARD OF DIRECTORS DOES NOT INTEND TO PAY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE, STOCKHOLDERS MAY HAVE TO SELL THEIR
SHARES OF OUR COMMON STOCK TO REALIZE A RETURN ON THEIR INVESTMENT IN THE
COMPANY.
The holders of our common stock are entitled to receive dividends when,
as and if declared by our Board of Directors out of funds legally available
therefor. To date, we have paid no dividends. Our Board of Directors does not
intend to declare any dividends in the foreseeable future, but instead intends
to retain all earnings, if any, for use in our business operations. Accordingly,
a return on an investment in shares of our common stock may be realized only
through a sale of such shares, if at all.
USE OF PROCEEDS
The potential net proceeds to the Company from the exercise of the
warrants for shares of common stock covered by this prospectus will be up to
approximately $1,986,250. The Company intends to use such net proceeds, if any,
for general working capital and other corporate purposes. As of the end of
trading hours on December 6, 2005 when the Company's common stock closed at
$3.35 per share, all of the warrant shares covered by this prospectus were
"in-the-money," meaning that the holder of the warrant could acquire the shares
at a strike price lower than the market price then in effect. There can be no
assurance that any of these warrants will be exercised before they expire and,
as a result, that the Company will receive any proceeds from them. Even if some
or all of these warrants are exercised, the Company cannot predict when they
will be exercised and when the proceeds will be received.
The Company will receive no proceeds from any sales of the shares of
common stock issuable upon the exercise of the warrants. The selling
stockholders of these shares will receive all of the net proceeds from such
sales.
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock and the
Company presently intends to retain earnings to finance the expansion of its
business. Payment of future dividends, if any, will be at the discretion of the
Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, current and anticipated
cash needs and plans for expansion.
16
PRICE RANGE OF COMMON STOCK
The Company's common is listed and trades on the American Stock
Exchange under the symbol "WHT." After a period in which the Company's common
stock was not publicly traded, the Company's common stock began trading again in
very limited quantities in the "Electronic Pink Sheets" of the National
Quotation Bureau during or about March 2004. Management believes that, prior to
these sales, no public sale of the Company's common stock had occurred since
June 2002. In any event, after a reasonable effort, management was unable to
find any data regarding the bid, ask and sales prices of the Company's common
stock since January 1, 2000 (if any such data exists) up until April 6, 2004.
The following table sets forth the high and low reported closing prices for the
Company's Common Stock for completed quarters since April 6, 2004. Such
quotations represent interdealer prices, without retail markup, markdown or
commission, and do not necessarily represent the price of actual transactions
for the fiscal quarters indicated.
HIGH LOW
---- ---
2005
Third Quarter $4.10 $3.35
Second Quarter 4.65 3.53
First Quarter 5.50 3.05
2004
Fourth Quarter $4.75 $2.74
Third Quarter 3.20 2.70
Second Quarter 3.40 1.25
As of December 7, 2005, the Company had 194 holders of record.
Management believes that the Company has between 400 and 500 beneficial holders
of its stock, although the exact number of these holders cannot be determined.
BUSINESS
General
In February 2004, Westside Energy Corporation (the "Company")
decided to focus its efforts on the acquisition of attractive crude oil and
natural gas prospects, and the exploration, development and production of oil
and gas on these prospects. For several years prior to February 2004, the
Company had been dormant from a business perspective. The Company is focusing
its efforts initially in the State of Texas. The Company's major emphasis is on
participation in the oil and gas segment, acquiring interests in prospective
acreage and producing oil and gas properties, and participating in exploration
and development drilling operations. The Company's principal products are crude
oil and natural gas, although as of the date of this Prospectus, the Company has
produced these products in only limited quantities. The Company expects to
engage in a broad range of activities associated with the oil and gas business
in an effort to develop oil and gas reserves. With the assistance of the
Company's management, independent contractors retained from time to time by the
Company, and, to a lesser extent, unsolicited submissions, the Company intends
to identify prospects that it believes are suitable for acquisition and
drilling. The description of the Company's business contained in the remainder
of this section captioned "BUSINESS," including the subsection captioned "Plan
of Operation," is expected to change significantly (but in ways that are not now
entirely certain) if the Company closes the acquisition of all of the
outstanding equity interests in EBS Oil and Gas Partners Production Company,
L.P. and its affiliates. In the event of the closing of this acquisition, the
Company intends to amend or supplement this Prospectus to provide additional
information about the acquisition and expected changes in the Company's business
thereafter.
When the Company acquires an interest in acreage on which
exploration or development drilling is planned, the Company will assess the
relative potential and risks of each prospect and determine the degree to which
the Company will participate in exploration or development programs. In the
right circumstances, the Company will assume the entire risk of acreage
acquisition and drilling. On the other hand, the Company may determine that it
is more beneficial to invite industry participants to share the risk and the
reward of various prospects by financing some or all of the costs of drilling
contemplated wells. In such cases, the Company may retain a carried working
interest, a reversionary interest, or may be required to finance all or a
portion of the Company's proportional interest in the prospect. Although this
approach will reduce the Company's potential return should the drilling
operations prove successful, it will also reduce the Company's risk and
financial commitment to a particular prospect.
17
Conversely, the Company may from time to time participate in
drilling prospects offered by other parties if the Company believes that the
potential benefits from the drilling operations outweigh the risks and costs of
the proposed operations. This approach will allow the Company to diversify into
a larger number of prospects at a lower cost per prospect, but these operations
(commonly known as "farm-ins") are generally more expensive than operations
where the Company offers the participation to others (known as "farm-outs").
In addition to its exploration and drilling activities, the Company
expects that it will pursue opportunities to accumulate oil and gas reserves
through the purchase of existing reserves from others. In connection with this,
the Company may initiate workovers, recompletions, development drilling,
secondary and tertiary recovery operations and other production enhancement
techniques to maximize current production and the ultimate recovery of reserves
acquired or developed.
There can be no assurance that the Company will be successful in its
exploration, development and production activities. See "RISK FACTORS" herein.
Plan of Operation
Initial Activities
Currently, the Company's primary area of interest is the Barnett
Shale play, which is located in the north central part of the state of Texas.
Houston-based Mitchell Energy made the first economic completion in the Barnett
Shale in the early 1980's. The Barnett Shale is considered a world-class,
unconventional, blanket gas reservoir. At current gas prices, wells drilled in
this area are regarded as low-risk, high-reward opportunities due to their
expected long-term production profiles. Once focused largely in Denton and Wise
counties, expansion has occurred into several other counties. Productive
characteristics vary widely across the Barnett Shale play, reflecting the
geologic variability of the formation itself. These characteristics and their
variability present significant operational challenges to the establishment of
sufficient recovery efficiency. However, highly detailed reservoir
characterization studies and more refined drilling, completion, and fracturing
practices have improved well deliverability and economics.
The initial phase of the Company's plan of operation involves
drilling and testing wells on the Company's currently leased acreage in the
Barnett Shale to prove reserves, complete promising test wells, extract the oil
and gas that the Company finds, and deliver them to market. The Company believes
that this acreage is sufficient for a sustained drilling program well into the
future. The Company is also in the process of acquiring rights in additional
acreage.
Based on current prices for materials and services, the Company
anticipates that each vertical well in its targeted area will cost between
$350,000 and $1.4 million to drill, test and complete and that each horizontal
well in its targeted area will cost between $600,000 and $2.5 million to drill,
test and complete, with the costs highly dependent upon the drilling depth and
horizontal length of a particular well. The Company's anticipated costs of
drilling operations are based on estimates obtained from third-party service
providers. However, the actual costs of such operations may be more or less than
the estimates contained herein. If actual costs of operations exceed the
Company's estimates to any significant degree, the Company may require
additional funding to achieve its initial objectives.
Before committing substantial resources, including obtaining
necessary permits and preparing for drilling on any particular leased property,
the Company plans to complete its due diligence on the leased properties.
However, the Company may not in some instances incur the additional expense of
retaining lawyers to examine the title to the Company's mineral interests. This
practice could expose the Company to certain risks, which are described in "RISK
FACTORS - OUR APPROACH TO TITLE ASSURANCE COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS AND OPERATIONS." The Company did obtain a drill site title opinion
for the tract of land on which the Company's first two wells were drilled.
18
The Company will select future drill sites based on a variety of
factors, including information gathered from historical records and drill logs,
proximity to existing pipelines, ease of access for drilling equipment, seismic
data, the presence of oil and natural gas production in the immediate vicinity,
and consultations with the Company's geologist, geophysicist, operators,
drillers and frac companies. As a majority of this research information has
already been obtained, the Company believes that the future additional cost of
identifying drill sites will be low relative to other costs. With the exception
of the evaluation of the geological formations that the Company encounters
during the drilling process, the cost of which has been factored into the
Company's estimated drilling costs, the Company does not anticipate requiring
any further product research except possibly 3-D seismic.
Once the Company has identified a proposed drill site, it will
engage the services of a third party operator licensed to operate oil and gas
wells in the State of Texas. The operator will be responsible for permitting the
well, which will include obtaining permission from state authorities relative to
spacing requirements and any other state and federal environmental clearances
required at the commencement of the permitting process. Additionally, the
operator will formulate and deliver to all working interest owners an operating
agreement establishing each participant's rights and obligations in that
particular well. In addition to the permitting process, the operator will be
responsible for hiring the driller, frac company, construction contractor and
other third parties to provide services for all aspects of the drilling
operation, except for geological services, supervising their efforts, and
actually drilling the well to the target zone. Should the well be successful,
the operator will thereafter be responsible for completing the well and
connecting it to the most appropriate transmission facility for the hydrocarbons
produced. The Company expects to pay the operator commercially prevailing rates.
The Company intends to ensure that the operator selected has insurance believed
to be adequate.
The operator will be the caretaker of the well once production has
commenced. As such, the operator will be responsible for paying bills related to
the well, billing working interest owners for their proportionate expenses in
drilling and completing the well, and selling the production from the well.
Unless each interest owner sells its production separately, the operator will
collect purchase payments from the purchaser of the production, and, once a
division order has been established and confirmed by the interest owners, the
operator will issue checks monthly to each interest owner in accordance with its
appropriate interest. The operator will not perform these functions when each
interest owner sells its production separately, in which case the interest
owners will undertake these activities separately. After production commences
from a well, the operator also will be responsible for maintaining the well and
the wellhead site during the entire term of production or until such time as the
operator has been replaced.
Although the Company presently does not intend to seek status as a
licensed operator, if in the future the Company believes that seeking licensed
operator status is appropriate and the Company has adequate staff available to
it, the Company may decide to operate its own wells. If the acquisition of all
of the outstanding equity interests in EBS Oil and Gas Partners Production
Company, L.P. ("EBS") and its affiliates is completed, the Company will
thereupon attain licensed operator status.
The Company has entered into an agreement with Brammer Engineering,
Inc., engaging this company to act as the contract operator of the first two
wells drilled by the Company. Brammer has represented that it was founded in
1968 and has a staff of over 100 oil and gas professionals. Management believes
that Brammer is amply qualified to act as the contract operator of the Company's
wells. For future wells, the Company may use the services of Brammer or other
qualified contract operators. Management anticipates no significant issues
related to procuring the services of qualified contract operators in connection
with the initial phase of the Company's plan of operation. Notwithstanding the
preceding, drilling activity in the area of the Company's initial activities has
been and continues to be extremely high. This situation exposes the Company to
certain risks, which are described in "RISK FACTORS - THE UNAVAILABILITY OR HIGH
COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL AND OILFIELD SERVICES
COULD MATERIALLY AND ADVERSELY AFFECT US." Of these risks, the Company has
experienced difficulty in procuring the services of qualified drillers and
service providers. This difficulty has delayed and may continue to delay the
Company in executing its plan of operation and may result in higher costs for
these services. These delays may continue and could materially and adversely
affect our operations, which could materially and adversely affect the Company's
business, financial condition and results of operations.
19
Each well will be drilled and tested individually. If commercially
producible amounts of oil or gas are present, the well will be completed and
facilities installed to connect to gathering or pipeline facilities. Completed
wells that are producing and connected to distribution pipelines will begin
generating revenues as soon as they begin flowing although actual funds for the
sale of production may be delayed and not be received until 30 days after the
end of the month of sale or even longer. For wells with successful productions
tests, the Company may need to install necessary infrastructure to permit
delivery of the Company's gas from the wellhead to a major pipeline. The Company
has identified the locations of all major gathering and other facilities
currently installed in the general vicinity of the Company's target area and has
initiated contacts with the owners of these facilities to ascertain their
specific requirements with respect to transporting the Company's gas to
pipelines for transmission, including expected production volumes, gas quality,
and connection costs. Management believes that these pipelines usually purchase
all available gas that is in the vicinity of their systems. However, some of the
owners of these pipelines produce their own gas, which they also transport along
with other third-party gas such as that the Company intends to produce. Most of
the pipelines in the area of the Company's current oil and gas interests are not
required by law to transport any gas that the Company may produce. As a result,
if pipelines in the area reach capacity, any productive natural gas well
developed by the Company could be "shut-in" because of a lack of available
natural gas pipeline capacity.
The cost of installing appropriate infrastructure to deliver the
Company's gas to a pipeline or gatherer will vary depending upon the distance
the gas must travel from the wellhead to the pipeline tap, tap fees, and whether
the gas first must be treated to meet the purchasing company's quality
standards. To minimize the costs of transporting gas to existing pipelines, the
Company intends to drill as close to existing pipelines as practicable. However,
ultimate connection costs cannot be accurately predicted at this time.
Recent Developments
As of December 12, 2005, the Company had acquired a total leased
acreage position of 68,044 gross acres and 63,584 net acres in various Texas
counties in the Barnett Shale, including Jack, Wise, Denton, Cooke, Montague,
Hill, Ellis, Hamilton, Comanche and Mills Counties. As of December 12, 2005, all
of this acreage (other than 140 gross acres and 130 net acres) is "undeveloped
acreage," which the U.S. Securities and Exchange Commission (the "Commission")
defines as "lease acreage on which wells have not been drilled or completed to a
point that would permit the production of commercial quantities of oil and gas
regardless of whether such acreage contains proved reserves." Of the Company's
acreage, 140 gross acres and 130 net acres is regarded as "developed" acreage.
The Company completed its first well, the Lucille Pruitt #1, during November
2004, and its second well, the Lucille Pruitt #2H, during September 2005. For
additional information regarding these two wells, see the table captioned
"STATUS OF WELLS AS OF DECEMBER 12, 2005" below. In the fall of 2004, the
Company entered into a standard gas sales agreement with Dynegy, Inc. pursuant
to which Dynegy has agreed to purchase from the Company all gas production that
is realized from the approximately 352-acre tract upon which the Company's first
two wells were drilled and future Company wells are expected to be drilled. The
Company has entered into an agreement with Plains Marketing, LP to purchase all
oil production from these wells.
Moreover, the Company has completed its processing of a 4.3 square
mile three-dimensional seismic survey that it acquired in northern Hill County
over an area that includes a property leased by the Company. Based on this
survey, the Company selected a site for the first well to be drilled on this
property. As of December 12, 2005, the Company has permitted this well site and
constructed the drill pad. Utilizing the foregoing three-dimensional seismic
survey, the Company has also identified additional sites in northern Hill County
to be drilled in due course. The Company cannot assure anyone that it will find
any commercially producible amounts of oil or gas as a result of this drilling
program.
20
On April 18, 2005, the Company entered into an agreement (the "EBS
Agreement") with EBS Oil and Gas Partners Production Company, L.P. ("EBS"), a
privately held entity engaged in the drilling and completion of wells on various
oil and gas leases covering lands located in Cooke, Montague, and Wise Counties,
Texas. Under the terms of the EBS Agreement, the Company is making available to
EBS, on a revolving basis, funds of up to a maximum sum of $1,000,000
outstanding at any given time. The funds are advanced to cover the costs
incurred by EBS in connection with its acquisition of oil and gas leases. The
Company has the discretion as to whether or not to make any advances with
respect to any particular lease presented by EBS for financing pursuant to the
EBS Agreement. In consideration of the Company's providing this financing, the
Company receives (a) an interest in each lease with respect to which amounts are
advanced, the type and amount of the interest depending on the size of the net
revenue interest of the leasehold interest owners in the related lease, and (b)
an option to acquire an undivided interest (up to 25% without EBS's consent) in
each lease with respect to which amounts are advanced. As of December 12, 2005,
3,873 gross acres have been acquired under the EBS Agreement, and EBS owed an
outstanding balance to the Company under the EBS Agreement of $267,777.
Moreover, as of December 12, 2005, the Company had received interests in 7 wells
pursuant to the EBS Agreement. In addition, separate and apart from the EBS
Agreement, the Company has acquired from EBS an interest in another well, the
Smith No. 1. For additional information regarding these and the Company's other
wells, see the table captioned "STATUS OF WELLS AS OF DECEMBER 12, 2005" below.
Effective July 1, 2004, the Company acquired from 3-R Production,
Inc. oil and gas leases and interests in three low production wells, the Massey
#1, the Dean #1 and the Cynthia Dale #1. The purchase price for these assets was
$69,375. A total of 555 gross acres were held by these producing wells. In
December 2005, the Company sold these 555 gross acres at a per-acre sales price
of $600 (for aggregate sales proceeds of $333,000), together with 467 additional
acres, which were sold at a per-acre sales price of $300 (for aggregate
additional sales proceeds of $140,100
The following table gives certain information regarding the status
of wells in which the Company owns an interest:
STATUS OF WELLS AS OF DECEMBER 12, 2005
Well Interest Status Operator
1. Pruitt #1 75% working interest Workover/Refrac Brammer
2. Pruitt #2-H 100% working interest Producing Brammer
3. Pruitt #3 100% working interest Expected Spud - Brammer
Dec. 2005
4. Kirby #1 25% working interest & Flowing back EBS
override
5. Elam #1 25% working interest & Waiting on frac EBS
override and pipeline
6. Mitchell #1 25% working interest & Flowing back EBS
override
7. Christian #1 25% working interest & Waiting on frac EBS
override and pipeline
8. Smith #1 25% working interest Waiting on frac EBS
and pipeline
9. Summers #1 25% working interest & Waiting on frac EBS
override and pipeline
10.Nunneley #1 25% working interest & Drilling EBS
override
21
Capital Requirements
From the time that the Company changed its business focus to oil and
gas activities in February 2004 through the beginning of November 2004, the
Company financed its business through a series of financings that could be
regarded as involving "seed" capital or bridge financing. These financings were
undertaken to sustain the Company until it could raise additional long-term
capital. Many of these financings were funded in whole or in part by members of
the Company's management, either directly or through entities controlled by
them. This "seed" capital included a total of $1.11 million in debt financing,
all of which has either been repaid or converted into equity. In connection with
these borrowings, the Company granted warrants to purchase up to an aggregate of
820,000 shares of the Company's common stock for a per-share exercise price of
$.50. These warrants have a term of, and are exercisable for, five years. With
regard to equity financings, in February 2004 the Company raised "seed" capital
from management by selling to them, directly or through entities controlled by
them, a total or 4,080,000 shares of the Company's common stock for a per-share
purchase price of $.01. During the quarter ended June 30, 2004, the Company
completed a second round of equity financing by selling 385,500 units of the
Company's securities to a total of 17 accredited investors. Each unit was
comprised of two shares of the Company's common stock and a warrant to purchase
one share of the Company's common stock at a per share price of $2.50. The
warrants have a term of and are exercisable for two years. The purchase price
for a unit was $2.00, with the Company receiving aggregate offering proceeds of
$771,000 from the offering.
On November 2, 2004, the Company completed the private placement of
an aggregate of 10,000,000 shares of its common stock, $.01 par value, at a
price of $2.00 per share. The cash offering resulted in $20 million in gross
proceeds and approximately $18.5 million in net proceeds to the Company after
deducting placement-related costs. The shares were issued to a total of 50
investors, all of whom are accredited. The Company's placement agent received a
placement fee in the amount of $1,400,000, and was granted a five-year warrant
to purchase 300,000 shares of common stock at a purchase price of $2..00 per
share. A portion of the proceeds from this private placement was used to retire
indebtedness in the aggregate original principal amount of $810,000 plus
interest. All of this indebtedness was either owed directly to members of the
Company's management or owed to entities controlled by members of the Company's
management. Some of this indebtedness was secured by all of the Company's
assets, including the Company's current oil and gas interests as well as all
such interests to be acquired in the future. In connection with the payment of
this indebtedness, the liens on the Company's assets were released. In addition,
in connection with the closing of the private placement, a holder of a
short-term convertible promissory note having a principal balance of $300,000
converted the principal balance of the promissory note into 150,000 shares of
the Company's common stock. As a result of these transactions, the Company does
not now have any secured indebtedness or any indebtedness from any promissory
note. The Company expects that, as its plan of operation progresses, the Company
will seek third party debt financing, and (to the extent necessary) additional
equity financing, to further such plan.
Production from successful wells in the Company's exploration and
drilling program would provide the Company with cash flow, and proved reserves
would increase the value of the Company's leased rights and should enable the
Company to obtain bank financing (after the wells have produced for a period of
time to satisfy a prospective lender). Cash flow and conventional bank financing
are as critical to the Company's plan of operation as the equity infusion from
the Company's private placement that resulted in approximately $18.5 million in
net proceeds. Management believes that, if the Company's plan of operation
progresses (and production is realized) as planned, sufficient cash flow,
conventional bank financing and other debt and equity financing will be
available for purposes of properly pursuing the Company's plan of operation,
although the Company can make no assurances in this regard. The Company has
sufficient funds to pursue its business plan for the remainder of fiscal 2005
and into part of fiscal 2006. However, as of December 12, 2005, the Company has
formulated a preliminary business plan that has not been submitted to or
approved by the Company's Board of Directors. The Company would be required to
procure additional financing in order to pursue this preliminary plan, which
involves significant capital expenditures for the exploration, development, and
production of oil and gas reserves. The Company will definitely require
additional financing to consummate the acquisition of the outstanding equity
interests in EBS Oil and Gas Partners Production Company, L.P. and its
affiliates, but additional financing may be necessary even if the Company does
not consummate this acquisition for any reason. Management believes that the
Company's estimated future revenues will not be sufficient to finance the
preliminary 2006 plan, as currently drafted. The Company is currently
identifying sources of capital. The Company currently does not have any binding
commitments for, or readily available sources of, additional financing. The
Company cannot assure anyone that additional financing will be available to it
when needed or, if available, that it can
22
be obtained on commercially reasonably terms. If the Company does not obtain the
desired financing it could be constrained to pursue a less ambitious plan, which
could materially and adversely affect its business and financial condition, and
the Company will not be able to complete the acquisition of the outstanding
equity interests in EBS Oil and Gas Partners Production Company, L.P and its
affiliates.
To conserve on the Company's capital requirements, the Company may
in the future issue shares in lieu of cash payments to employees and outside
consultants, as it has done on a limited basis in the past. Moreover, to
conserve on the Company's capital requirements, the Company intends to
occasionally seek other industry investors who are willing to participate in the
Company's oil and gas activities. The Company expects to retain a promotional
interest in these prospects, but generally the Company will fund a portion (and
sometimes a significant portion) of the acquisition and drilling costs. Also,
the Company may acquire interests in properties by issuing shares of its common
stock.
Financial Information
Financial results for the quarter and year-to-date periods ended
September 30, 2005 are not comparable to financial results for the quarter and
year-to-date periods ended September 30, 2004 as the Company had limited
business operations during the first nine months of 2004. The Company's oil and
gas operations commenced in earnest with the drilling of the Company's first
well, the Lucille Pruitt #1, which was completed during November 2004.
The Company's total revenues of $78,525 in the quarter ended
September 30, 2005 are attributable to oil and gas sales primarily from the
Company's first two wells, the Lucille Pruitt #1 and #2H. The Company had no oil
and gas revenues for the quarter ended September 30, 2004. The Company realized
interest income for the quarter ended September 30, 2005 in the amount of
$85,934 reflecting investment returns on higher cash and marketable securities
balances throughout the period from funds raised in the private placement
completed on November 2, 2004. Interest income for the third quarter of 2004 was
$524. Total oil and gas revenues increased from the second quarter to the third
quarter of 2005 reflecting the impact of limited first production and sales from
the Lucille Pruitt #2H produced during the initial phase of the frac flow back
occurring during the last part of September 2005.
Expenses for the quarter ended September 30, 2005 were $484,537
as compared to $406,519 in start-up activities expenses for the quarter ended
September 30, 2004, and $889,357 in expenses for the second quarter of 2005,
which included expenses of $337,627 for three-dimensional seismic survey costs.
The Company incurred a net loss of $320,078, or $0.02 per share, for
the quarter ended September 30, 2005 as compared to a net loss of $405,995, or
$0.06 per share, for the quarter ended September 30, 2004, and a net loss of
$750,093, or $0.04 per share, for the second quarter of 2005.
Future Activities
If the Company is successful in its initial drilling activities, the
Company expects to continue with the subsequent development of its current
properties and additional properties it may acquire. The continuation of the
Company's plan of operation depends on the successful drilling and operation of
additional wells that produce commercial quantities of oil and gas and generate
significant positive cash flow. The Company intends to lease additional
available land to the extent that it believes such land will further the
Company's oil and gas oriented value creation activities. Such leases could be
in the Barnett Shale, other regions in Texas, or in areas outside of the state
of Texas.
Markets and Marketing
The petroleum industry has generally been characterized by rising oil
and natural gas commodity prices during 2005 and recent years. Also, the
industry has experienced increasing costs, particularly the cost of steel and
higher drilling and well servicing rig rates. World oil prices have increased in
response to political unrest and supply disruptions in Iraq and Venezuela while
North American gas prices have improved as supply and demand fundamentals have
strengthened. Significant factors that will impact commodity prices in the near
term include the final resolution of issues currently impacting Iraq and the
Middle East in general, the extent to which members of the Organization of
Petroleum Exporting Countries ("OPEC") and other oil exporting nations are able
to continue to manage oil supply through export
23
quotas and overall North American gas supply and demand fundamentals. Worldwide
oil and North American gas prices currently remain favorable. However, the
outlook for future commodity prices is uncertain.
The Company does not expect to refine any of its production, although
the Company may have to process some of its production to transport it or to
meet the purchasing company's quality standards. Instead, the Company expects
that all or nearly all of its production will be sold to a relatively small
number of customers. Production from the Company's properties will be marketed
consistent with industry practices. The availability of a ready market for the
Company's production will depend upon a number of factors beyond the Company's
control, including the availability of other domestic production, price, crude
oil imports, natural gas imports, the proximity and capacity of oil and gas
pipelines, and general fluctuations in supply and demand. Although the effect of
these factors cannot be accurately predicted or anticipated, the Company does
not anticipate any unusual difficulty in contracting to sell its production of
oil and gas to purchasers and end-users at prevailing market prices and under
arrangements that are usual and customary in the industry. However, there can be
no assurance that market, economic and regulatory factors will not in the future
materially and adversely affect the Company's ability to sell its production.
The Company will strive to develop markets with end-users, local distribution
companies, and natural gas brokers for gas produced from successful exploratory
and development wells. The Company expects that most of the natural gas that the
Company is able to find (if any) will be transported through gas gathering
systems and gas pipelines that are not owned by the Company. The Company's
current leased land is in fairly close proximity to gas pipelines suitable for
carrying the Company's production. Transportation space on gas gathering systems
and pipelines is occasionally limited and at times unavailable due to repairs or
improvements being made to the facilities or due to use by other gas shippers
with priority transportation agreements or who own or control the relevant
pipeline. If transportation space is restricted or is unavailable, the Company's
cash flow from the affected properties could be adversely affected. The Company
expects that it will generally sell its crude oil and natural gas production
pursuant to long-term sales contracts. The Company has currently entered into
only one long-term sales contract. However, the Company does not believe that it
will have any difficulty in entering into additional long-term sales contracts
for its production, although there can be no assurance in this regard.
Sales prices for oil and gas production are negotiated based on factors
normally considered in the industry, such as the spot price for gas or the
posted price for oil, price regulations, regional price variations, distance
from the well to the pipeline, well pressure, estimated reserves, commodity
quality and prevailing supply conditions. Historically, prices of crude oil and
natural gas have experienced high volatility. This high volatility is a result
of ever changing perceptions throughout the industry centered on supply and
demand. Although the Company cannot predict the occurrence of events that may
affect oil and gas prices or the degree to which oil and gas prices will be
affected, the prices for any oil or gas that the Company produces should be
equivalent to current market prices in the geographic region, and the Company
will strive to obtain the best price in the area of its production. The
Company's revenues, profitability and future growth will depend substantially on
prevailing prices for crude oil and natural gas. Decreases in the prices of oil
and gas would likely adversely affect the carrying value of any proved reserves
that the Company is successful in establishing and the Company's prospects,
revenues, profitability and cash flow.
Competition
The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The Company believes that the level of
competition in these areas will continue into the future and may even intensify.
In the areas of oil and gas exploration, development and production, competitive
advantage is gained through superior capital investment decisions, technological
innovation and costs management. The Company's competitors include major oil and
gas companies, a large number of independent oil and gas companies, and numerous
individuals. Competition focuses primarily on the acquisition of properties that
appear attractive for the exploration for oil and gas. The principal competitive
factors in the acquisition of oil and gas properties include the staff and data
necessary to identify, investigate and purchase such properties and the
financial resources necessary to acquire and develop them. The Company also will
compete for the equipment and labor required to operate and to develop its
properties. Most of the Company's competitors have substantially larger
operating staffs and greater financial and other resources. In addition, larger
competitors may be able to absorb the burden of any changes in federal, state
and local laws and regulations more easily than the Company can, which would
adversely affect the Company's competitive position. These competitors may be
able to pay more for natural gas and oil properties and may be able to define,
evaluate, bid for and acquire a greater number of properties than the Company
can. In addition, most of the Company's competitors have been operating for a
much longer time than the Company has and have demonstrated the ability to
operate through a number of industry cycles. The Company's success in acquiring
additional properties and discovering reserves in the future will depend upon
its ability to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. The effect of the intense
competition that the Company will face cannot now be determined.
24
Regulation
Oil and Gas Regulation
The availability of a ready market for oil and gas production depends
upon numerous factors beyond the Company's control. These factors include state
and federal regulation of oil and gas production and transportation, as well as
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the amount of oil
and gas available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
For example, a productive gas well may be "shut-in" because of an over-supply of
gas or lack of an available gas pipeline in the areas in which the Company may
conduct operations. State and federal regulations are generally intended to
prevent waste of oil and gas, protect rights to produce oil and gas between
owners in a common reservoir, and control contamination of the environment.
Pipelines and gas plants are also subject to the jurisdiction of various
federal, state and local agencies which may affect the rates at which they are
able to process or transport gas from the Company's properties.
The Company's sales of natural gas will be affected by the
availability, terms and costs of transportation. The rates, terms and conditions
applicable to the interstate transportation of gas by pipelines are regulated by
the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Acts
("NGA"), as well as under Section 311 of the Natural Gas Policy Act ("NGPA").
Since 1985, the FERC has implemented regulations intended to increase
competition within the gas industry by making gas transportation more accessible
to gas buyers and sellers on an open-access, non-discriminatory basis.
The Company's sales of oil are also affected by the availability, terms
and costs of transportation. The rates, terms, and conditions applicable to the
interstate transportation of oil by pipelines are regulated by the FERC under
the Interstate Commerce Act. FERC has implemented a simplified and generally
applicable ratemaking methodology for interstate oil pipelines to fulfill the
requirements of Title VIII of the Energy Policy Act of 1992 comprised of an
indexing system to establish ceilings on interstate oil pipeline rates. The FERC
has announced several important transportation-related policy statements and
rule changes, including a statement of policy and final rule issued February 25,
2000 concerning alternatives to its traditional cost-of-service rate-making
methodology to establish the rates interstate pipelines may charge for their
services. The final rule revises FERC's pricing policy and current regulatory
framework to improve the efficiency of the market and further enhance
competition in natural gas markets.
In the event the Company conducts operations on federal, state or
Indian oil and gas leases, such operations must comply with numerous regulatory
restrictions, including various nondiscrimination statutes, royalty and related
valuation requirements, and certain of such operations must be conducted
pursuant to certain on-site security regulations and other appropriate permits
issued by the Bureau of Land Management ("BLM") or Minerals Management Service
("MMS") or other appropriate federal or state agencies.
The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this restriction
is violated, the corporation's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM
(which administers the Mineral Act) provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect.
Certain holders of equity interests in the Company may be citizens of foreign
countries, which at some time in the future might be determined to be
non-reciprocal under the Mineral Act.
25
Environmental Regulation
- General. The Company's activities will be subject to existing
federal, state and local laws and regulations governing environmental quality
and pollution control. The Company anticipates that, absent the occurrence of an
extraordinary event, compliance with existing federal, state and local laws,
rules and regulations governing the release of materials in the environment or
otherwise relating to the protection of the environment will not have a material
effect upon the Company's operations, capital expenditures, earnings or
competitive position. The Company's activities with respect to exploration,
drilling and production from wells, natural gas facilities, including the
operation and construction of pipelines, plants and other facilities for
transporting, processing, treating or storing natural gas and other products,
will be subject to stringent environmental regulation by state and federal
authorities including the Environmental Protection Agency ("EPA"). Such
regulation can increase the cost of such activities. In most instances, the
regulatory requirements relate to water and air pollution control measures.
- Waste Disposal. The Company currently leases properties that it will
try to use for the production of oil and gas. Although the Company intends to
utilize operating and disposal practices that are standard in the industry,
hydrocarbons or other wastes may be released on or under the properties that the
Company currently or now after owns or leases. State and federal laws applicable
to oil and gas wastes and properties have become stricter. In the future, the
Company could be required to remediate property, including ground water,
containing or impacted by releases of hydrocarbons or other wastes or to perform
remedial plugging operations to prevent future or mitigate existing
contamination. The Company may generate wastes, including hazardous wastes that
are subject to the federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The EPA has limited the disposal options for certain
wastes that are designated as hazardous under RCRA ("Hazardous Wastes").
Furthermore, it is possible that certain wastes generated by the Company's oil
and gas operations that are currently exempt from treatment as Hazardous Wastes
may in the future be designated as Hazardous Wastes, and therefore be subject to
more rigorous and costly operating and disposal requirements.
- Superfund. The federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law,
imposes joint and several liability for costs of investigation and remediation
and for natural resource damages, without regard to fault or the legality of the
original conduct, on certain classes of persons with respect to the release into
the environment of substances designated under CERCLA as hazardous substances
("Hazardous Substances"). These classes of persons or potentially responsible
parties ("PRP's") include the current and certain past owners and operators of a
facility where there is or has been a release or threat of release of a
Hazardous Substance and persons who disposed of or arranged for the disposal of
the Hazardous Substances found at such a facility. CERCLA also authorizes the
EPA and, in some cases, third parties to take actions in response to threats to
the public health or the environment and to seek to recover from the PRP's the
costs of such action. Although CERCLA generally exempts petroleum from the
definition of Hazardous Substances in the course of the Company's operations,
the Company may in the future generate wastes that fall within CERCLA's
definition of Hazardous Substances. The Company may also in the future become an
owner of facilities on which Hazardous Substances have been released by previous
owners or operators. The Company may in the future be responsible under CERCLA
for all or part of the costs to clean up facilities at which such substances
have been released and for natural resource damages. The Company has not been
named a PRP under CERCLA nor does the Company know of any prior owners or
operators of the Company's current properties that are named as PRP's related to
their ownership or operation of such property.
- Air Emissions. The Company's operations will be subject to local,
state and federal regulations for the control of emissions of air pollution.
Major sources of air pollutants are subject to more stringent, federally imposed
permitting requirements, including additional permits. Administrative
enforcement actions for failure to comply strictly with air pollution
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could require the Company to forego construction, modification or operation of
certain air emission sources, although the Company believes that in the latter
cases the Company would have enough permitted or permittable capacity to
continue the Company's operations without a material adverse effect on any
particular producing field.
- Clean Water Act. The Clean Water Act ("CWA") imposes restrictions and
strict controls regarding the discharge of wastes, including produced waters and
other oil and natural gas wastes, into waters of the United States, a
26
term broadly defined. These controls have become more stringent over the years,
and it is probable that additional restrictions will be imposed in the future.
Permits must be obtained to discharge pollutants into federal waters. The CWA
provides for civil, criminal and administrative penalties for unauthorized
discharges of oil, hazardous substances and other pollutants. It imposes
substantial potential liability for the costs of removal or remediation
associated with discharges of oil or hazardous substances. State laws governing
discharges to water also provide varying civil, criminal and administrative
penalties and impose liabilities in the case of a discharge of petroleum or it
derivatives, or other hazardous substances, into state waters. In addition, the
EPA has promulgated regulations that may require the Company to obtain permits
to discharge storm water runoff, including discharges associated with
construction activities. In the event of an unauthorized discharge of wastes,
the Company may be liable for penalties and costs.
Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not materially and adversely impact
the Company.
Employees
As of December 12, 2005, the Company had four employees. The Company
expects that it will employ some combination of between five to seven employees
or outside consultants over the next two years. The Company does not now foresee
problems in hiring additional qualified employees to meet its labor needs.
Facilities
The Company's principal executive offices are fairly small and are
located at 4400 Post Oak Parkway, Suite 2530, Houston, Texas 77027. They are
rented for a three-year term, which commenced in March 2005. Management believes
that additional space will be needed if the Company's plan of operation
progresses in accordance with its terms. Management further believes that such
additional space and any required alternative office space can be readily
obtained if needed.
Legal Proceedings
The Company is currently involved in certain pending legal proceedings.
The Company believes that each of these proceedings is routine and incidental to
the Company's business. The Company further believes that an adverse or a
favorable outcome in any or all of these proceedings will not materially affect
the Company either adversely or favorably (as the case may be), although there
can be no assurances in this regard. Moreover, in the future, the Company may
become involved in various additional legal proceedings from time to time,
either as a plaintiff or as a defendant, and either in or outside the normal
course of business. The Company is not now in a position to determine when (if
ever) such a legal proceeding may arise. If the Company ever becomes involved in
a legal proceeding, the Company's financial condition, operations, or cash flows
could be materially and adversely affected, depending on the facts and
circumstances relating to such proceeding.
Available Information
The Company has filed with the Commission a Registration Statement on
Form SB-2 and exhibits relating thereto (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), of which this prospectus is a
part. This prospectus does not contain all the information set forth in the
Registration Statement. Reference is made to such Registration Statement for
further information with respect to the Company and the securities of the
Company covered by this prospectus. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
statement is qualified in its entirety by reference to the copy of the related
document filed with the Commission.
The Company has registered as a reporting company under the Securities
Exchange Act of 1934 (the "Exchange Act"). As a consequence, the Company will
file with the Commission Annual Reports on Form 10-KSB, Quarterly Reports on
Form 10-QSB, and Current Reports on Form 8-K. The Annual Reports on Form 10-KSB
will contain audited financial statements. After they are filed, these reports
can be inspected at, and copies thereof may be obtained at prescribed rates, at
the Commission's Public Reference Room located at 450 Fifth Street, N.W.,
Washington,
27
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information
on the Public Reference Room. The Commission maintains a World Wide Web site
that contains reports, proxy statements and information statements and other
information (including the Registration Statement) regarding issuers that file
electronically with the Commission. The address of such site is
http://www.sec.gov. The Company's reports can be inspected at, and copies
downloaded from, the Commission's World Wide Web.
MANAGEMENT
The directors and executive officers of the Company are as follows:
Name Age Positions
Keith D. Spickelmier 44 Chairman of the Board
Jimmy D. Wright 46 Director, Chief Executive Officer
and Chief Financial Officer
Douglas G. Manner 50 Director, Chief Operating Officer
and Chairman of the Compensation
Committee*
John T. Raymond 35 Director and Chairman of the
Nominating Committee
Herbert C. Williamson 57 Director and Chairman of the
Audit Committee
Sean J. Austin 53 Vice President and
Corporate Controller
* Mr. Manner recently became employed as the Company's Chief Operating
Officer, and consequently will resign as Chairman of the Compensation
Committee in the fairly near future so that an outside director can be
appointed in this capacity.
Keith D. Spickelmier has served as a Director of the Company since May
2002. He also served as the President, Treasurer & Secretary of the Company from
May 2002 until February 2004, at which time he resigned so that Jimmy D. Wright
could be elected as the Company's Chief Executive Officer. Mr. Spickelmier has
also served as an attorney in the capacities of Of Counsel and consultant to the
law firm of Haynes and Boone LLP from April 2001 through July 2003. He has also
engaged in personal investment activity during that time. Prior to that time,
Mr. Spickelmier had been a partner with the law firm of Verner, Liipfert,
Bernhard, McPherson and Hand since 1993. He has an undergraduate degree from the
University of Nebraska at Kearney and a law degree from the University of
Houston.
Jimmy D. Wright has served as a Director and the Chief Executive
Officer and Chief Financial Officer of the Company since February 2004. He
continues to serve as the chief executive officer of several entities
wholly-owned by him (including Westside Resources, LP) holding investments in
oil, gas and related businesses, some of these entities being started as early
as August 2002. Mr. Wright has indicated that he does not intend to make any
further oil and gas investments through these or any other entities that would
be competitive with the Company's business pursuits. From June 2001 to July
2002, Mr. Wright served in several capacities with the EnergyClear organization,
first as Senior Vice President of EnergyClear Operating Corp., then the operator
of EnergyClear Corporation. He later was also elected as the President of
EnergyClear Corporation itself, then an over-the-counter energy clearinghouse
approved by the Commodity Futures Trading Commission. From February 1997 to June
2001, Mr. Wright held various senior management positions with Midcoast Energy
Resources Inc., which merged into Enbridge, Inc.., a publicly traded company.
When he left this organization, Mr. Wright held the position of Chief Executive
Officer of an International subsidiary of Enbridge Energy Partners, LP., also a
publicly traded company. Mr. Wright holds a Bachelor of Science degree in
Mechanical Engineering from the University of Memphis.
28
Effective March 30, 2005, Douglas G. Manner was elected to the
Company's Board of Directors. On December 8, 2005, effective January 1, 2006,
Douglas G. Manner was appointed as the Company's Chief Operating Officer. Prior
to being appointed as the Company's Chief Operating Officer, Mr. Manner served
as Senior Vice President and Chief Operating Officer of Kosmos Energy, LLC,
which is a private energy company exploring for oil and gas in the offshore
regions of West Africa. Mr. Manner joined Kosmos Energy in January 2004. Prior
to Kosmos Energy, Mr. Manner served as President and Chief Operating Officer of
White Stone Energy, a Houston based oil and gas advisory firm from August 2002
until December, 2003. From May 2001 until June 2002, Mr. Manner served as
Chairman and Chief Executive Officer of Mission Resources, and he previously
served as Chief Executive Officer and President of Bellwether Exploration, one
of Mission's predecessor companies, from June 2000 until May 2001. Mr. Manner
was named Chairman of the Board at Bellwether in December 2000. Bellwether was
comprised of core domestic assets as well as operations in Ecuador and the
Ukraine. Mr. Manner joined Bellwether in May 2000 from Gulf Canada Resources
Limited where he served as Vice President and Chief Operating Officer from July
1998 through May 2000. Mr. Manner's previous experience includes 15 years (1981
through 1996) with Ryder Scott Petroleum Engineers, an international independent
reservoir engineering firm. He joined the company as a consulting reservoir
engineer in 1981. Mr. Manner has served on the boards of directors for Gulf
Midstream Service, ROC Oil and Petrovera Energy Company. In addition to serving
on our board, Mr. Manner also serves on the Board of Managers of White Stone
Energy, and the Board of Directors of Cordero Energy and Zenas Energy. Mr.
Manner received a Bachelor's of Science degree in mechanical engineering from
Rice University in 1977. He is a professional engineer certified by the Texas
Board of Professional Engineers, and he is a member of the Society of Petroleum
Engineers.
Effective March 30, 2005, John T. Raymond was elected to the
Company's Board of Directors. Mr. Raymond currently manages various investments
through Lynx Holdings, a private company of which he is the owner and Chief
Executive Officer. Mr. Raymond has served as a director of Vulcan Energy
Corporation since July 2004, and he served as the Chief Executive Officer of
Vulcan Energy from July 2004 to April 2005. Mr. Raymond also served as President
and Chief Executive Officer of Plains Resources Inc., the predecessor company to
Vulcan Energy, from December 2002 to April 2005. Prior thereto, Mr. Raymond
served as Executive Vice President and Chief Operating Officer of Plains
Resources from May 2001 to November 2001 and President and Chief Operating
Officer since November 2001. Mr. Raymond also served as President and Chief
Operating Officer of Plains Exploration and Production from December 2002 to
March 2004. Mr. Raymond also served as a director of Plains All American from
June 2001 to April 2005. He was Director of Corporate Development of Kinder
Morgan, Inc. from January 2000 to May 2001. He served as Vice President of
Corporate Development of Ocean Energy, Inc. from April 1998 to January 2000. He
was Vice President of Howard Weil Labouisse Friedrichs, Inc. from 1992 to April
1998. Mr. Raymond earned his Bachelor of Science in management at the Tulane
University AB Freeman School of Business.
Effective March 30, 2005, Herbert C. Williamson was elected to the
Company's Board of Directors. Mr. Williamson has over 30 years of experience in
the oil and gas industry and investment banking business. He has served on the
board of Mission Resources Corp. since November of 2002. From April 1997 to
February 2002, Mr. Williamson served as director of Pure Resources, Inc. and its
predecessor, and during this tenure he served as chairman of the special
committee in connection with the tender offer made by Unocal. From September
2000 through March 2003, he was also a director of Southwest Royalties, Inc. and
during this tenure he was chairman of the independent directors committee for
that company's sale to Clayton Williams Energy. Since 1996, Mr. Williamson has
also served as a director of Merlon Petroleum Company, a private oil and gas
company engaged in exploration and production in East Texas and Egypt, and Mr.
Williamson had previously served as the chief financial officer of this company.
From April 1985 through April 1995, Mr. Williamson served as vice chairman and
executive vice president for Parker & Parsley Petroleum Company, now Pioneer
Natural Resources Company, and from October 1998 to April 1999, he served as
chief financial officer with Seven Seas Petroleum. From April 1995 through May
1999, Mr. Williamson was an investment banker with Petrie Parkman & Company and
prior to that he was a director in the Energy Group at C S First Boston. He
currently serves as a Colonel in the U.S. Army Reserve. Mr. Williamson earned a
Bachelor of Arts degree from Ohio Wesleyan University and a Master of Business
Administration from Harvard University.
Effective May 4, 2005, Sean J. Austin was appointed as Vice President
and Corporate Controller of the Company. Prior to joining the Company, Mr.
Austin spent 23 years with Amerada Hess (NYSE: AHC) holding
29
senior management positions in the company's New York and Houston offices. Most
recently, from 1999 until 2004, Mr. Austin served as Vice President, Finance and
Administration, Exploration and Production for Amerada Hess in Houston. From
1995 to 1999, he served as Vice President and Corporate Controller in the New
York office. Prior to joining Amerada Hess, Mr. Austin served from 1974 to 1979
as an officer in the United States Navy. He holds a Bachelors degree in
Accounting from the University of Notre Dame and a Master of Business
Administration degree from the Amos Tuck School of Business at Dartmouth
College.
The authorized number of directors of the Company is presently fixed at
five. Each director serves for a term of one year that expires at the following
annual stockholders' meeting. During February 2004, Messrs. Wright and
Spickelmier entered into a Voting Agreement pursuant to which they agreed for
two years to vote all of their shares of stock in the Company to elect a person
nominated by each of them separately (for a total of two nominees) to the
Company's Board of Directors. Executive officers are appointed by the Board of
Directors and serve until their successors are appointed. There are no family
relationships, or other arrangements or understandings between or among any of
the directors, executive officers or other person pursuant to which such person
was selected to serve as a director or officer, other than the Voting Agreement
described immediately above.
The Board of Directors has established an Audit Committee. The Audit
Committee supervises the financial affairs of the Company and generally reviews
the results and scope of the audit and other services provided by the Company's
independent accountants and reports the results of their review to the Board and
to the Company's management. Currently the Audit Committee consists of Herbert
C. Williamson, Douglas G. Manner and John T. Raymond . The Company's Board of
Directors has determined that each of Herbert C. Williamson, Douglas G. Manner
and John T. Raymond is an "audit committee financial expert," as defined by
applicable Commission rules and regulations.
EXECUTIVE COMPENSATION
The Company paid no compensation to any member of management during
fiscal 2003 and 2002. Commencing November 1, 2004, as described herein, the
Company began paying a salary to Jimmy D. Wright, the Company's Chief Executive
Officer and Chief Financial Officer, and consulting fees to Keith D.
Spickelmier, the Company's Chairman of the Board. During fiscal 2004, a total of
$25,000 was paid to Mr. Wright and of $12,000 was paid to Mr. Spickelmier,
pursuant to these arrangements. No other form of compensation was paid to or
granted in favor of either of Messrs. Wright or Spickelmier during fiscal 2004.
In addition, the Company has not adopted any retirement, pension, profit
sharing, stock option or insurance programs or other similar programs for the
benefit of its management or employees.
Commencing November 1, 2004, the Company began paying an annual salary
in the amount of $150,000 to Jimmy D. Wright for serving as the Company's Chief
Executive Officer and Chief Financial Officer. This salary is subject to
increase, decrease or elimination at any time for any reason at the discretion
of the Company's Board of Directors. In addition, commencing November 1, 2004,
the Company engaged Keith D. Spickelmier, the Company's Chairman of the Board,
as a consultant and began paying to him a monthly consulting fee in the amount
of $6,000. This consulting engagement is terminable at the will of either the
Company or Mr. Spickelmier, and the consulting fee is subject to increase,
decrease or elimination at any time for any reason at the discretion of the
Company's Board of Directors. Neither of Messrs. Wright or Spickelmier has
entered into a written employment or consulting agreement or a covenant not to
compete agreement with the Company. As a result, each of Messrs. Wright and
Spickelmier may discontinue providing services to the Company at any time and
for any reason, and even thereafter commence competition with the Company.
Conversely, the Company may discontinue employing or engaging either of Messrs.
Wright or Spickelmier at any time and for any reason at the discretion of the
Company's Board of Directors. However, in view of the current composition of the
Company's Board of Directors (which includes each of Messrs. Wright and
Spickelmier), the Company's discontinuation of either of Mr. Wright's employment
or Mr. Spickelmier's consulting engagement is not likely in the foreseeable
future.
The Company has entered into an employment agreement (the "Manner
Employment Agreement") with Douglas G. Manner, a director and the Company's
Chief Operating Officer, effective January 1, 2006. The Manner Employment
Agreement has a two-year term, subject to earlier termination by the Company
upon certain customary events and by Mr. Manner upon certain events amounting to
a sale of the Company (such events being referred to hereinafter as a "Change of
Control"). Under the Manner Employment Agreement, Mr. Manner is to receive an
annual salary of $175,000. Furthermore, per the Manner Employment Agreement, the
Company agreed to issue to Mr. Manner as a sign-on bonus a number of shares of
the Company's common stock (the shares comprising the sign-on stock bonus are
referred to hereinafter as the "Bonus Shares") equal to one and one-half times
the number of any such shares that Mr. Manner purchases for cash directly from
the Company at any time on or before March 31, 2006, up to a maximum of 225,000
Bonus Shares. Of these Bonus Shares, one-third will vested immediately,
one-third may become vested on the first anniversary date of the Manner
Employment Agreement (subject to Mr. Manner's continued employment), and
one-third may become vested on the second anniversary date of the Manner
Employment Agreement (subject to Mr. Manner's continued employment). All of the
Bonus Shares shall immediately vest upon Mr. Manner's termination of the Manner
Employment Agreement after a Change of Control. Moreover, per the Manner
Employment Agreement, the Company agreed to issue to Mr. Manner as additional
bonuses 100,000 shares (for an aggregate total of 600,000 shares) of the
Company's common stock each time that the 30-day trading average of the
Company's common stock equals or exceeds for the first time each of the
following figures: $5.00, $6.00, $7.00, $8.00, $9.00 and $10.00. Upon Mr.
Manner's termination of the Manner Employment Agreement after a Change of
Control, Mr. Manner shall be entitled to be issued immediately all of the
600,000 shares that have not already been issued. Mr. Manner is also entitled to
participate in any and all employee benefit plans now existing or hereafter
established for the Company's employees, provided that he meets the eligibility
criterion therefor.
30
The Company has entered into an employment agreement (the "Austin
Employment Agreement") with Sean J. Austin, a Vice President and the Corporate
Controller. The Austin Employment Agreement has an indefinite term. Under the
Austin Employment Agreement, Mr. Austin is to receive an annual salary of
$140,000, subject to annual review. Furthermore, per the Austin Employment
Agreement, Mr. Austin received a stock grant with respect to 25,000 shares of
the Company's common. Of these shares, 5,000 vested immediately, 10,000 may
become vested on the first anniversary date of the Austin Employment Agreement
(subject to Mr. Austin's continued employment), and 10,000 may become vested on
the second anniversary date of the Austin Employment Agreement (subject to Mr.
Austin's continued employment). Mr. Austin is also entitled to participate in
any and all employee benefit plans hereafter established for the Company's
employees.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's initial oil and gas interests were undivided interests in
the leases covering approximately 819 gross acres of land in Jack, Wise and
Denton Counties in Texas. The interests were acquired by the Company from
Westside Resources, L.P. (the "Partnership"), an entity formerly known as
"Westside Energy, L.P." and wholly-owned by Jimmy D. Wright, a director of the
Company and the Company's Chief Executive Officer and Chief Financial Officer.
These initial interests were acquired pursuant to the terms, provisions and
conditions of a lease acquisition agreement that management believes to be
reasonable and customary. They were acquired in consideration of the issuance by
the Company to the Partnership of 700,000 shares of the Company's common stock
and the assumption of the liabilities associated with such interests. These
shares constituted approximately 11.8% of the shares of the Company's common
stock outstanding after the completion of all of the stock issuances occurring
at that time. Because the shares of common stock received by the Partnership
were not registered under the Securities Act of 1933, as amended (the "Act"),
such shares are "restricted securities" (as defined in Rule 144 promulgated
under the Act) and accordingly, may not be sold or transferred by the
Partnership unless such shares are registered under the Act or are sold or
transferred pursuant to an exemption therefrom. In connection with this
acquisition, the Company agreed to register all shares owned by the Partnership
or to be acquired pursuant to derivative securities, including the shares issued
in connection with this acquisition. This prospectus covers the shares issued in
connection with this acquisition to the Partnership.
Mr. Wright has indicated that the Partnership expended approximately
$27,000 in direct costs in connection with the acquisition and maintenance of
the interests in the leases conveyed to the Company. In connection with the
acquisition of the interests in the leases, in consideration of the Company's
agreement to reimburse the Partnership for all of its reasonable expenses
incurred in connection with the offers described immediately hereafter, the
Company also acquired and assumed from the Partnership the rights and obligation
of any contracts that would result from the acceptance of certain outstanding
lease offers made by the Partnership to certain landowners.
31
The consideration for the acquisition of the interests in the leases
described above (including the number of shares issued to the Partnership) was
determined in arms-length negotiations between Mr. Wright and Keith D.
Spickelmier, the Company's only member of management at the time. The factors
addressed by Mr. Spickelmier in negotiating this consideration included the
present developmental status of the leases; the future prospects for the leases
in terms of revenues and earnings; an assessment of Mr. Wright's ability to
contribute to the management of the Company's business; and anticipated ability
of the Company's business to grow by virtue of the Company's ownership of the
leases.
Prior to and at the time of the consummation of the acquisition by the
Company of the interests in the leases described above, Mr. Spickelmier and Mr.
Wright had been and continued to be co-investors in a few other business
endeavors. Mr. Spickelmier's large percentage ownership of the Company's
outstanding common stock gives to him an interest in assuring that the terms of
the Company's acquisition of the leases are commercially reasonable.
Accordingly, Mr. Spickelmier does not believe that his prior and current
relationship with Mr. Wright impaired his ability to negotiate commercially
reasonable terms in connection with the Company's acquisition of the interests
in the leases.
In addition to the preceding, the Company raised "seed" capital in the
amount of approximately $450,800 from Mr. Spickelmier, the Partnership, and
Bering Partners No. 2, LLC, an entity owned by the Company's two directors and
certain other investors. A total of $410,000 of this capital was structured in
the form of loans from Bering Partners No. 2, LLC to the Company secured by all
of the Company's assets, including the oil and gas interests briefly described
herein as well as all such interests acquired in the future. Interest accrued on
the loans at a rate of 10% per annum. In consideration of making the loans, the
Company granted warrants to the owners of Bering Partners No. 2, LLC to purchase
up to an aggregate of 820,000 shares of the Company's common stock for a
per-share exercise price of $.50. These warrants have a term of and are
exercisable for five years. All of the preceding indebtedness has been paid in
full. The remaining $40,800 of the initial capital took the form of an equity
investment in the Company's common stock. Mr. Spickelmier and The Partnership
made this investment in exchange for the issuance to them of an aggregate of
4,080,000 shares of the Company's common stock. At that time, these shares
constituted approximately 68.7% of the shares of the Company's common stock
outstanding after the completion of all of the stock issuance then taking place.
Because the shares of common stock received by Mr. Spickelmier and the
Partnership were not registered under the Securities Act of 1933, as amended
(the "Act"), such shares are "restricted securities" (as defined in Rule 144
promulgated under the Act) and accordingly, may not be sold or transferred by
Mr. Spickelmier and the Partnership unless such shares are registered under the
Act or are sold or transferred pursuant to an exemption therefrom. In connection
with this investment, the Company agreed to register all shares owned by Mr.
Spickelmier or the Partnership or to be acquired pursuant to derivative
securities, including the shares issued in connection with this investment and
the shares to be acquired upon exercise of the warrants issued in connection
with the loans described above. This prospectus covers the shares issued in
connection with this investment and the shares to be acquired upon exercise of
the warrants issued in connection with the loans described above.
Moreover, between the middle of September 2004 through the middle of
October 2004, the Company issued to three accredited investors a total of five
unsecured short-term convertible promissory notes in the aggregate original
principal amount of $700,000. These accredited investors included Mr.
Spickelmier, the Partnership and a new investor in the Company (the "New
Investor"). Each of Mr. Spickelmier and the Partnership provided $200,000 of the
$700,000 aggregate amount, while the New Investor provided $300,000. Interest
accrued on the loans at a rate of 10% per annum. The notes were convertible into
shares of the Company's stock at a rate of one share for every $2.00 of
indebtedness. The New Investor converted his note in original principal amount
of $300,000 into 150,000 shares. Each of Mr. Spickelmier and the Partnership
received repayment of their notes in the aggregate original principal amount of
$400,000, plus interest out of the proceeds of the Company's $20 million private
placement completed in November 2004.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 30, 2005, the number of
shares of the Company's Common Stock beneficially owned by (i) each director of
the Company; (ii) each of the Company's executive officers; (iii) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock; and (iv) all executive officers and directors as a group.
Unless otherwise indicated, each person has sole voting and dispositive power
over such shares. Shares not outstanding but deemed beneficially owned by virtue
of the right of a
32
person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percent owned by such group or
person. Unless otherwise indicated, the address for each person named in the
table is 4400 Post Oak Parkway, Suite 2530, Houston, Texas 77027.
Name and Address of Beneficial Ownership (1)
Beneficial Owner Number Percent
Westside Resources, L.P. 3,435,693(2) 19.4%
Jimmy D. Wright 3,435,693(3) 19.4%
Keith D. Spickelmier 2,636,260 (4) 14.7%
Douglas G. Manner 62,666 (5) *
John T. Raymond 62,666 *
Herbert C. Williamson 12,666 *
Sean J. Austin 25,000 *
All directors and officers 6,234,951 (6) 34.1%
as a group (six persons)
Wellington Management Company, LLP 2,224,500 (7) 12.8%
75 State St
Boston, MA 02109
SDS Capital Group SPC, Ltd. 933,400 (8) 5.4%
Ogier & Boxalls
Queensgate House
113 South Church Street
P.O. Box 1234GT
Grand Cayman, Cayman Islands
North Sound Capital LLC 925,000(9) 5.3%
53 Forest Avenue, Suite 202
Old Greenwich, CT 06870
Spindrift Investors (Bermuda) L.P. 892,300(10) 5.1%
Clarendon House, 2 Church Street
Hamilton, Bermuda
* Less than one percent
(1) Includes shares beneficially owned pursuant to options and warrants
exercisable within 60 days.
(2) Includes 3,144,585 shares held directly and 291,108 shares that may be
purchased pursuant to warrants that are currently exercisable. Jimmy D.
Wright has sole voting power and sole investment power over these
shares. These shares are also included in the table in the figure of
shares beneficially owned by Mr. Wright.
(3) All of these shares are held by Westside Resources, L.P., an entity
over which Mr. Wright has complete control. Accordingly, Mr. Wright has
sole voting power and sole investment power over these shares. These
shares are also included in the table in the figure of shares
beneficially owned by Westside Resources, L.P.
(4) Includes 2,332,368 shares held directly and 303,892 shares that may
be purchased pursuant to warrants that are currently exercisable.
33
(5) Does not include a currently indeterminable number of shares (up to
225,000) that may be issued as an employee sign-on bonus and a
currently indeterminable number of shares (up to 600,000) that may be
issued as an additional performance bonus.
(6) Includes 2,495,366 shares held directly, 3,144,585 shares held by a
related entity, and 595,000 shares that may be purchased pursuant to
warrants that are currently exercisable; does not include a currently
indeterminable number of shares (up to 225,000) that may be issued to
Mr. Manner as an employee sign-on bonus and a currently indeterminable
number of shares (up to 600,000) that may be issued to Mr. Manner as an
additional performance bonus.
(7) Wellington Management Company, LLP ("WMC") has filed with the
Commission a Schedule 13G on November 10, 2004 indicating that it is is
a registered investment advisor. WMC has advised the Company that
clients of WMC are the record holders of all of the 2,224,500 shares
reflected in the table. However, in its capacity as investment advisor,
WMC may be deemed to own beneficially all of the 2,224,500 shares
reflected in the table. Of these shares, 892,300 shares are also
included in the table in the figure of shares beneficially owned by
Spindrift Investors (Bermuda) L.P.
(8) SDS Capital Group SPC, Ltd. ("SDS") has filed with the Commission a
Schedule 13G on November 5, 2004 indicating that SDS Management, LLC
and Steven Derby have shared voting power and shared dispositive power
with respect to all of the shares reported by SDS Capital Group SPC,
Ltd. Accordingly, each of SDS Management, LLC and Mr. Derby may be
deemed to own beneficially all of the 933,400 shares reflected in the
table.
(9) Includes 647,500 shares held by North Sound Legacy International Ltd.,
259,000 shares held by North Sound Legacy Institutional Fund LLC, and
18,500 shares held by North Sound Legacy Fund, LLC. North Sound Capital
LLC has filed with the Commission a Schedule 13G on November 4, 2004
indicating that its is the managing member of each of the preceding
entities, and that Thomas McAuley is the ultimate managing member of
North Sound Capital LLC. In these capacities, North Sound Capital LLC
and Thomas McAuley may be deemed to own beneficially all of the 925,000
shares reflected in the table.
(10) Spindrift Investors (Bermuda) L.P. has filed with the Commission a
Schedule 13G on November 2, 2004 indicating that Wellington Global
Holdings, Ltd. and Wellington Global Administrator, Ltd. are its
general partners. As such, these two general partners may be deemed to
own beneficially all of the 892,300 shares reflected in the table.
These 892,300 shares are also included in the table in the figure of
shares beneficially owned by Wellington Management Company, LLP
DESCRIPTION OF SECURITIES
Capital Stock.
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.01 par value per share and 10,000,000 shares of Preferred Stock,
$.01 par value per share.
Common Stock.
The authorized Common Stock of the Company consists of 50,000,000
shares, par value $0.01 per share. After taking into consideration the issuance
of certain of the shares being registered, approximately 18,668,745 shares of
Common Stock will be issued and outstanding. All of the shares of Common Stock
are validly issued, fully paid and nonassessable. Holders of record of Common
Stock will be entitled to receive dividends when and if declared by the Board of
Directors out of funds of the Company legally available therefore. In the event
of any liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or otherwise, after payment of provision for payment of the
debts and other liabilities of the Company, including the liquidation preference
of all classes of preferred stock of the Company, each holder of Common Stock
will be entitled to receive his pro rata portion of the remaining net assets of
the Company, if any. Each share of Common stock has one vote, and there are no
preemptive, subscription, conversion or redemption rights. Shares of Common
Stock do not have cumulative voting rights, which means that the holders of a
majority of the shares voting for the election of directors can elect all of the
directors.
34
Preferred Stock.
The Company's Certificate of Incorporation authorizes the issuance of
up to 10,000,000 shares of the Company's $0.01 par value preferred stock (the
"Preferred Stock"). As of the date of this Prospectus, no shares of Preferred
Stock were outstanding. The Preferred Stock constitutes what is commonly
referred to as "blank check" preferred stock. "Blank check" preferred stock
allows the Board of Directors, from time to time, to divide the Preferred Stock
into series, to designate each series, to issue shares of any series, and to fix
and determine separately for each series any one or more of the following
relative rights and preferences: (i) the rate of dividends; (ii) the price at
and the terms and conditions on which shares may be redeemed; (iii) the amount
payable upon shares in the event of involuntary liquidation; (iv) the amount
payable upon shares in the event of voluntary liquidation; (v) sinking fund
provisions for the redemption or purchase of shares; (vi) the terms and
conditions pursuant to which shares may be converted if the shares of any series
are issued with the privilege of conversion; and (vii) voting rights. Dividends
on shares of Preferred Stock, when and as declared by the Board of Directors out
of any funds legally available therefore, may be cumulative and may have a
preference over Common Stock as to the payment of such dividends. The provisions
of a particular series, as designated by the Board of Directors, may include
restrictions on the ability of the Company to purchase shares of Common Stock or
to redeem a particular series of Preferred Stock. Depending upon the voting
rights granted to any series of Preferred Stock, issuance thereof could result
in a reduction in the power of the holders of Common Stock. In the event of any
dissolution, liquidation or winding up of the Company, whether voluntary or
involuntary, the holders of each series of the then outstanding Preferred Stock
may be entitled to receive, prior to the distribution of any assets or funds to
the holders of the Common Stock, a liquidation preference established by the
Board of Directors, together with all accumulated and unpaid dividends.
Depending upon the consideration paid for Preferred Stock, the liquidation
preference of Preferred Stock and other matters, the issuance of Preferred Stock
could result in a reduction in the assets available for distribution to the
holders of the Common Stock in the event of liquidation of the Company. Holders
of Preferred Stock will not have preemptive rights to acquire any additional
securities issued by the Company. Once a series has been designated and shares
of the series are outstanding, the rights of holders of that series may not be
modified adversely except by a vote of at least a majority of the outstanding
shares constituting such series.
One of the effects of the existence of authorized but unissued shares
of Common Stock or Preferred Stock may be to enable the Board of Directors of
the Company to render it more difficult or to discourage an attempt to obtain
control of the Company by means of a merger, tender offer at a control premium
price, proxy contest or otherwise and thereby protect the continuity of or
entrench the Company's management, which concomitantly may have a potentially
adverse effect on the market price of the Common Stock. If in the due exercise
of its fiduciary obligations, for example, the Board of Directors were to
determine that a takeover proposal were not in the best interests of the
Company, such shares could be issued by he Board of Directors without
stockholder approval in one or more private placements or other transactions
that might prevent or render more difficult or make more costly the completion
of any attempted takeover transaction by diluting voting or other rights of the
proposed acquirer or insurgent stockholder group, by creating a substantial
voting block in institutional or other hands that might support the position of
the incumbent Board of Directors, by effecting an acquisition that might
complicate or preclude the takeover, or otherwise.
Nevada Legislation.
Sections 78.411-78.444 of the General Corporation law of Nevada
("Business Combination Statute") would be applicable to us when we have 200 or
more stockholders and certain other conditions are met. These provisions may
make it more difficult to effect certain transactions between a corporation and
a person or group that owns or has the right to acquire 10% or more of the
corporation's outstanding voting stock, or a person who is an affiliate or
associate of the corporation and who was the owner of 10% or more of such voting
stock at any time within three years immediately prior to the date in question
("Interested Stockholder"). The Business Combination Statute prevents the
following transactions between the corporation and the Interested Stockholder
for three years following the date the stockholder became a 10% or more holder
of the corporation's voting stock, unless certain conditions are met: (i) any
merger or consolidation; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of the corporation's assets having a total market
value equal to 10% or more of the total market value of all the assets of the
corporation; or 5% or more of the total market value of all outstanding shares
of the corporation or representing 10% or more of the earning power of the
corporation; (iii) the issuance or transfer by the corporation of any shares of
the corporation that have an aggregate market value equal to 5% or more of the
aggregate market value of all the outstanding shares of the corporation to
stockholders except under the exercise of warrants or rights
35
to purchase shares offered, or a dividend or distribution paid or made, pro rata
to all stockholders of the corporation; (iv) the adoption of any plan or
proposal for the liquidation or dissolution of the corporation proposed by, or
under any agreement or arrangement or understanding, whether or not in writing,
with the Interested Stockholder; (v) any reclassification of securities,
recapitalization, merger or consolidation or other transaction which has the
effect, directly or indirectly, of increasing the proportionate share of the
outstanding shares owned by the Interested Stockholder, and (vi) any receipt by
the Interested Stockholder of the benefit, except proportionally as a
stockholder of the corporation, of any loan or other financial assistance or any
tax credit or other tax advantage provided by or through the corporation. The
three-year ban does not apply if either the proposed transaction or the
transaction by which the Interested Stockholder became an Interested Stockholder
is approved by the Board of Directors of the corporation prior to the date the
stockholder became an Interested Stockholder.
Shares Eligible for Future Sale.
Sales of a substantial amount of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market and
could impair the Company's ability to raise additional capital through the sale
of its equity securities in the future. After taking into consideration the
issuance of certain of the shares being registered, approximately 18,668,745
shares of Common Stock will be issued and outstanding. After the registration of
the shares covered by this prospectus, management believes that all of the
Company's outstanding shares may be legally sold, so long as (in the case of the
shares covered by this prospectus) the registration statement of which this
prospectus is a part remains current and effective. Substantial sales of the
shares covered by this prospectus or otherwise could adversely affect the market
price of the Common Stock.
SELLING STOCKHOLDERS
The following table sets forth certain information as of September 30,
2005 pertaining to the beneficial ownership of Common Stock by the Selling
Stockholders. All of the shares beneficially owned by each Selling Stockholder
(other than 876 shares held by Keith D. Spickelmier and 12,666 shares held by
each of Douglas G. Manner and John T. Raymond) are being offered pursuant to
this prospectus. If all of the shares covered by this prospectus are sold, no
Selling Stockholder will beneficially own any shares after the offering, other
than Keith D. Spickelmier (who would continue to hold 876 shares) and Douglas G.
Manner and John T. Raymond (who would each continue to hold 12,666 shares). In
view of the preceding, the columns for "Number of Shares Being Offered" and
"Beneficial Ownership After Offering" have been omitted.
36
Beneficial Ownership
Stockholder Prior to Offering
Westside Resources, LP 3,435,693(1)
Keith D. Spickelmier 2,636,260(2)
WTC-CIF Energy Portfolio 67,900(3)(24)
WTC-CTF Energy Portfolio 522,600(3)(24)
Spindrift Partners, LP 741,700(3)(24)
Spindrift Investors (Bermuda) L.P. 892,300(3)(24)
Virtus Capital,L.P. 14,200(3)(25)
Knoll Capital Fund II Master Fund, Ltd. 366,200(3)(26)
Kellogg Capital Group, LLC 300,000(3)(27)
North Sound Legacy Instituional Fund LLC 259,000(3)(28)
North Sound Legacy Fund, LLC 18,500(3)(28)
North Sound Legacy International Ltd. 647,500(3)(28)
SDS Capital Group SPC, Ltd. 933,400(3)(29)
GLG North American Equity Fund 34,300(3)(30)
GLG North American Opportunity Fund 299,300(3)(30)
Dynamis Fund, LP 308,000(3)(31)
ASF Canadian Small Cap Fund 170,000(3)(32)
ASF Canadian Resources Fund 159,500(3)(32)
GWL Canadian Resources Fund 35,600(3)(32)
London Life Resources Fund 14,900(3)(32)
ASF Special US Class 80,000(3)(33)
GB Barnett 15,000(3)
Allsion Keeley 8,000(3)
Lorie Gordon 12,500(3)
Michelle Hijazi 7,000(3)
37
Atif Khan 50,000(3)
Mary Sponsel Stein 7,000(3)
Sheerin McConnell 5,000(3)
Gary R. Peterson 15,000(3)
Christopher M. Katz 25,000(3)
William C. O'Malley and Jane L. O'Malley 325,000(3)
Douglas G. Manner 62,666(4)
John T. Raymond 62,666(4)
Laurie Litherland-Dotter 15,000(5)
Bruce M. Feichtinger 22,500(5)
James P. & Sharon S. Wilson 150,000(5)
JCE/CBI Ltd. 150,000(5)(34)
Rainbow Investment Company 47,500(6)
Barton L. Duckworth 40,000(7)
Spring Street Partners, LP 125,000(8)
RWM Partnership No. 1, Ltd. 125,000(9)
Lavery Investments Ltd. 62,500(10)
J. Burke O'Malley 150,000(11)
Dolphin Ventures, LLC 107,500(12)
Catherine I. McCauley 284,100(13)
Joseph F. Montle 40,000(14)
Sterne, Agee & Leach, Inc. 300,000(15)
Corbin J. Robertson III 162,500(16)
Michael H. McConnell 139,000(17)
Steven J. Gibson 50,000 (18)
A. Kelly & Roseanette Williams 15,000(19)
Robert Ittner 37,500(20)
ALCORN Interests. Inc. 15,500(21)
38
George H. Dodd, Trustee 7,150 (22)
Henry F. Dodd, Trustee 7,150 (22)
Peregrine Limited Partnership 41,097(23)
Merlin Limited Partnership 77,320(23)
Condor Limited Partnership 221,583(23)
(1) Includes 3,144,585 shares held directly and 291,108 shares
that may be purchased pursuant to warrants that are currently
exercisable. Of the shares owned outright, 700,000 were
acquired in exchange for an assignment of the Company's
initial oil and gas interests, while the remaining 2,444,585
shares were acquired from the Company for cash in private
transactions. All of the warrants were acquired from the
Company in private transactions in connection with the
preceding equity or other debt investments in the Company.
Jimmy D. Wright has sole voting power and sole investment
power over these shares. Because Mr. Wright was a director and
the Company's Chief Executive Officer at the time of these
issuances, the issuances of these shares are claimed to be
exempt, and the issuance of the common stock underlying the
warrants will be claimed to be exempt, pursuant to Section
4(2) of the Securities Act of 1933 (the "Act").
(2) Includes 2,332,368 shares held directly and 303,892 shares
that may be purchased pursuant to warrants that are currently
exercisable. Of the shares owned outright, 551,453 shares were
acquired from Bering Partners No. 2, LLC upon that entity's
distribution of all of its assets, while the remaining
1,795,415 shares were acquired from the Company for cash in
private transactions. All of the warrants were acquired from
the Company in private transactions in connection with the
preceding equity or other debt investments in the Company.
Because Mr. Spickelmier was a director and the Company's
Chairman of the Board at the time of these issuances, the
issuances of these shares are claimed to be exempt, and the
issuance of the common stock underlying the warrants will be
claimed to be exempt, pursuant to Section 4(2) of the Act. Of
the number of shares indicated in the table, 876 shares are
not being registered and will continue to be held even if all
of the shares covered by this prospectus are sold.
(3) These shares were issued on or about November 2, 2004 in a
private placement to a total of 48 investors of an aggregate
of 10,000,000 shares of the Company's common stock, $.01 par
value, at a price of $2.00 per share. The issuances of the
common stock in this placement are claimed to be exempt
pursuant to Rule 506 of Regulation D under the Act. No
advertising or general solicitation was employed in offering
these securities. The offering and sale was made only to
accredited investors, and subsequent transfers were restricted
in accordance with the requirements of the Act.
(4) Of these securities, 50,000 were issued in the private
placement described in footnote (3) above, while 12,666 shares
were privately issued as remuneration for service as a Company
director. The figure for Mr. Manner does not include a
currently indeterminable number of shares (up to 225,000) that
may be issued to him as an employee sign-on bonus and a
currently indeterminable number of shares (up to 600,000) that
may be issued to him as an additional performance bonus.
(5) Two-thirds of these shares are owned outright, while one-third
of these shares may be purchased pursuant to warrants that are
currently exercisable. These shares and warrants were part of
units offered during the quarter ended June 30, 2004 in a
private placement to a total of 17 investors of an aggregate
of 385,500 units of the Company's securities at a price of
$2.00 per unit. Each unit was comprised of two shares of the
Company's common stock and a warrant to purchase one
additional share of the Company's common stock. The issuances
of the common stock and the warrants is claimed to be exempt,
and the issuance of the common stock underlying the warrants
will be claimed to be exempt, pursuant to Rule 506 of
Regulation D under the Act. No advertising or general
solicitation was employed in offering these securities. The
offering and sale was made only to accredited investors, and
subsequent transfers were restricted in accordance with the
requirements of the Act.
(6) Includes 35,000 shares owned outright and 12,500 shares that
may be purchased pursuant to warrants that are currently
exercisable. Of these securities, 10,000 shares owned outright
were issued in the private placement described in footnote (3)
above, and 25,000 shares owned outright and all of the
warrants were issued in the private placement described in
footnote (5) above. The Company has been advised that Duane
Herbst has sole voting power and sole investment power over
these shares.
39
(7) Includes 32,500 shares owned outright and 7,500
shares that may be purchased pursuant to warrants that are currently
exercisable. Of these securities, 17,500 shares owned outright were
issued in the private placement described in footnote (3) above, and
15,000 shares owned outright and all of the warrants were issued in the
private placement described in footnote (5) above.
(8) Of these securities, 50,000 shares were issued in the private
placement described in footnote (3) above, and 75,000 shares were
issued in the private placement described in footnote (5) above or were
acquired upon the exercise of warrants issued in the private placement
described in footnote (5) above. The Company has been advised that
Michael McConnell has sole voting power and sole investment power over
these shares.
(9) Includes 100,000 shares owned outright and 25,000 shares that may
be purchased pursuant to warrants that are currently exercisable. Of
these securities, 50,000 shares owned outright were issued in the
private placement described in footnote (3) above, and 50,000 shares
owned outright and all of the warrants were issued in the private
placement described in footnote (5) above. The Company has been advised
that Richard Warren Mithoff has sole voting power and sole investment
power over these shares.
(10) Of these securities, 25,000 shares were issued in the private
placement described in footnote (3) above, 25,000 shares were issued in
the private placement described in footnote (5) above, and 12,500
shares were acquired upon the exercise of warrants issued in the
private placement described in footnote (5) above. The Company has been
advised that T. Pat Harrison has sole voting power and sole investment
power over these shares.
(11) These shares were issued upon the conversion of a short-term
convertible promissory note having a principal balance of $300,000.
This issuance of shares upon conversion of the promissory note is
claimed to be exempt pursuant to Rule 506 of Regulation D under the
Act. No advertising or general solicitation was employed in offering
these securities. The offering and sale was made only to one accredited
investor, and subsequent transfers were restricted in accordance with
the requirements of the Act.
(12) Includes 2,500 shares owned outright and 105,000 shares that may
be purchased pursuant to warrants that are currently exercisable. Of
these securities, all of the shares owned outright and warrants to
purchase 5,000 shares were issued to this selling stockholder as a loan
procurement fee. The issuances of the common stock and the warrants is
claimed to be exempt, and the issuance of the common stock underlying
the warrants will be claimed to be exempt, pursuant to Rule 506 of
Regulation D under the Act. No advertising or general solicitation was
employed in offering these securities. The offering and sale was made
only to one accredited investor, and subsequent transfers were
restricted in accordance with the requirements of the Act. Warrants to
purchase 60,000 shares were issued in consideration of a loan to the
Company. The issuances of the warrants to purchase 60,000 shares are
claimed to be exempt, and the issuances of the common stock underlying
the warrants will be claimed to be exempt, pursuant to Rule 506 of
Regulation D under the Act. No advertising or general solicitation was
employed in offering these securities. The offering and sale was made
only to five accredited investors, and subsequent transfers were
restricted in accordance with the requirements of the Act. Warrants to
purchase 40,000 shares were acquired in a private secondary
transaction. The Company has been advised that Paul Montle has sole
voting power and sole investment power over these shares.
(13) Includes 234,100 shares held directly and 50,000 shares that may
be purchased pursuant to warrants that are currently exercisable. The
warrants were issued in the private placement described in footnote (5)
above. The shares held outright were either issued in the private
placement described in footnote (5) above or pursuant to the exercise
of warrants issued in consideration of a loan to the Company. The
issuances of the shares held outright pursuant to the exercise of the
warrants issued in consideration of a loan to the Company are claimed
to be exempt pursuant to Rule 506 of Regulation D under the Act. No
advertising or general solicitation was employed in offering these
securities. The offering and sale of the related warrants was made only
to five accredited investors, and subsequent transfers were restricted
in accordance with the requirements of the Act.
40
(14) Includes 40,000 shares that may be purchased pursuant to warrants
that are currently exercisable. The issuances of these warrants are
claimed to be exempt, and the issuances of the common stock underlying
the warrants will be claimed to be exempt, pursuant to Rule 506 of
Regulation D under the Act. No advertising or general solicitation was
employed in offering these securities. The offering and sale was made
only to five accredited investors, and subsequent transfers were
restricted in accordance with the requirements of the Act.
(15) Includes 300,000 shares that may be purchased pursuant to warrants
that are currently exercisable. These warrants were issued to the
selling stockholder for services provided in connection with the
private placement described in footnote (3) above. The issuance of the
warrants is claimed to be exempt, and the issuance of the common stock
underlying the warrants will be claimed to be exempt, pursuant to Rule
506 of Regulation D under the Act. No advertising or general
solicitation was employed in offering these securities. The offering
and sale was made only to one accredited investor, and subsequent
transfers were restricted in accordance with the requirements of the
Act. This selling stockholder is a registered broker-dealer, whose
Board of Directors has sole voting power and sole investment power over
these shares.
(16) Included 37,500 shares owned outright, and 125,000 shares also
beneficially owned by Michael H. McConnell and Spring Street Partners,
LP, an entity over whose shares Mr. Robertson (with Mr. McConnell) has
shared voting power and shared investment power. The foregoing 125,000
shares are also reflected in the table as being held by Mr. McConnell
and Spring Street Partners, LP. The 37,500 shares owned outright were
issued in the private placement described in footnote (3) above.
(17) Included 14,000 shares owned outright, and 125,000 shares also
beneficially owned by Corbin J. Robertson III and Spring Street
Partners, LP, an entity over whose shares Mr. McConnell (with Mr.
Robertson) has shared voting power and shared investment power. The
foregoing 125,000 shares are also reflected in the table as being held
by Mr. Robertson and Spring Street Partners, LP. The 14,000 shares
owned outright were issued in the private placement described in
footnote (3) above.
(18) Includes 30,000 shares owned outright and 20,000 shares that may
be purchased pursuant to warrants that are currently exercisable. All
of the shares held outright and all of the warrants were issued in the
private placement described in footnote (5) above.
(19) Includes 15,000 shares that may be purchased pursuant to warrants
that are currently exercisable. The warrants were issued in the private
placement described in footnote (5) above.
(20) These shares were either issued in the private placement described
in footnote (5) above or pursuant to the exercise of warrants issued in
such private placement.
(21) Includes 5,500 shares outright and 10,000 shares that may be
purchased pursuant to warrants that are currently exercisable. All of
the shares held outright and all of the warrants were issued in the
private placement described in footnote (5) above. The Company has been
advised that George Alcorn, Jr. has sole voting power and sole
investment power over these shares.
(22) These shares were acquired in a private secondary transaction.
(23) These shares were acquired in a private secondary transaction. The
Company has been advised that Coy Monk has sole voting power and sole
investment power over these shares.
(24) The Company has been advised that Wellington Management Company,
LLP, a registered investment adviser, has sole voting power and sole
investment power over these shares.
(25) The Company has been advised that Steven Gidumal and Vince Rossi
have shared voting power and shared investment power over these shares.
(26) The Company has been advised that Fred Knoll has sole voting power
and sole investment power over these shares. (27) The Company has been
advised that Charles K. Kellogg, Mark Schalles and Nicholas Cappelleri
have shared voting
power and shared investment power over these shares.
(28) The Company has been advised that Thomas E. McAuley has sole
voting power and sole investment power over these shares.
(29) The Company has been advised that Steve Derby has sole voting
power and sole investment power over these shares. Mr. Derby
disclaims beneficial ownership of these shares.
(30) The Company has been advised that Noam Gettesman, Pierre
Lagrange and Philippe Jabre have shared voting power and
shared investment power over these shares.
41
(31) The Company has been advised that Alex Bocock, Frederic Bocock
and John H. Bocock have shared voting power and shared
investment power over these shares. Frederic Bocock has
indicated that he is a one-third owner of Dynamis Advisors
(the General Partner of this selling stockholder), and that he
is an employee of Scott Stringfellow, a registered
broker-dealer based in Richmond Virginia. However, this
selling stockholder is not a registered broker-dealer and does
not believe that it is an affiliate of a registered broker-dealer.
(32) The Company has been advised that Charles Oliver
has sole voting power and sole investment power over these shares.
(33) The Company has been advised that Cameron Scruens has sole
voting power and sole investment power over these shares.
(34) The Company has been advised that Andrew Echols, Hugh Echols
and John Echols have shared voting power and shared investment power
over these shares.
PLAN OF DISTRIBUTION
As of the date of this Prospectus, we have not been advised by the
selling stockholders as to any plan of distribution. Shares owned by the selling
stockholders, or by their partners, pledgees, donees (including charitable
organizations), transferees or other successors in interest, may from time to
time be offered for sale either directly by such individual, or through
underwriters, dealers or agents or on any exchange on which the shares may from
time to time be traded, in the over-the-counter market, or in independently
negotiated transactions or otherwise. The methods by which the shares may be
sold include:
* a block trade (which may involve crosses) in which the broker
or dealer so engaged will attempt to sell the securities as
agent but may position and resell a portion of the block as
principal to facilitate the transaction;
* purchases by a broker or dealer as principal and resale by
such broker or dealer for its own account pursuant to
this prospectus;
* exchange distributions and/or secondary distributions;
* sales in the over-the-counter market;
* underwritten transactions;
* ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
* privately negotiated transactions.
Such transactions may be effected by the selling stockholders at market
prices prevailing at the time of sale or at negotiated prices. The selling
stockholders may effect such transactions by selling the common stock to
underwriters or to or through broker-dealers, and such underwriters or
broker-dealers may receive compensations in the form of discounts or commissions
from the selling stockholders and may receive commissions from the purchasers of
the common stock for whom they may act as agent. The selling stockholders may
agree to indemnify any underwriter, broker-dealer or agent that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act. We have agreed to
register the shares for sale under the Securities Act and to indemnify the
selling stockholders, certain representatives of the selling stockholders and
each person who participates as an underwriter in the offering of the shares
against certain civil liabilities, including certain liabilities under the
Securities Act.
In connection with sales of the common stock under this prospectus, the
selling stockholders may enter into hedging transactions with broker-dealers,
who may in turn engage in short sales of the common stock in the course of
hedging the positions they assume. After the Registration Statement of which
this prospectus is a part is declared effective, the selling stockholders also
may sell shares of common stock short and deliver them to close out the short
positions, or loan or pledge the shares of common stock to broker-dealers that
in turn may sell them.
The selling stockholders and any underwriters, dealers or agents that
participate in distribution of the shares may be deemed to be underwriters, and
any profit on sale of the shares by them and any discounts, commissions or
concessions received by any underwriter, dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act. Of the selling
stockholders, Sterne, Agee & Leach, Inc. and Kellogg Capital Group, LLC are
registered broker-dealers. As such, these selling stockholders are
"underwriters" within the meaning of Section 2(11) of the Securities Act with
respect to the shares offered by them pursuant to this prospectus.
42
There can be no assurances that the selling stockholders will sell any
or all of the shares offered under this prospectus.
EXPERTS
The financial statements of the Company as of December 31, 2004, and
for each of the years in the two-year period ended December 31, 2004, included
herein and in the registration statement have been audited by Malone & Bailey,
PLLC, independent certified public accountants, and have been included herein in
reliance upon their report upon the authority of said firm as experts in
accounting and auditing.
43
WESTSIDE ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report..............................................F-1
Balance Sheets as of December 31, 2004 and December 31, 2003..............F-2
Statements of Income for the years ended December 31, 2004
and December 31, 2003..................................................F-3
Statements of Stockholder Equity for the years ended
December 31, 2004 and December 31, 2003 ...............................F-4
Statements of Cash Flows for years ended December 31,
2004 and December 31, 2003 ............................................F-5
Notes to Financial Statements ............................................F-6
Nine Months Ended September 30, 2005 (unaudited):
Balance Sheets (unaudited) as of September 30, 2005
and September 30, 2004................................................G-1
Statements of Income (unaudited) for the nine months
ended September 30, 2005 and September 30, 2004.......................G-2
Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2005 and September 30, 2004.......................G-3
Notes to Condensed Financial Statements...................................G-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Westside Energy Corporation
Houston, Texas
We have audited the accompanying balance sheet of Westside Energy Corporation as
of December 31, 2004, and the related statements of operations, stockholders'
equity (deficit), and cash flows for the two years then ended. These financial
statements are the responsibility of Westside's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westside Energy Corporation, as
of December 31, 2004, and the results of its operations and its cash flows for
the periods described in conformity with accounting principles generally
accepted in the United States of America.
MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
February 11, 2005
See summary of significant accounting policies and notes to
financial statements.
F-1
WESTSIDE ENERGY CORPORATION
BALANCE SHEET
December 31, 2004
ASSETS
Current assets
Cash $ 15,995,691
Accounts receivable 114,934
Prepaid insurance 30,648
------------
Total current assets 16,141,093
Oil and gas properties, using
successful efforts accounting
Proved properties 709,968
Unproved properties 2,610,492
Accumulated depreciation, depletion,
amortization, and impairment (366,813)
------------
Net oil and gas properties 2,953,647
Other property and equipment, net of
accumulated depreciation of $0 25,909
------------
TOTAL ASSETS $ 19,120,649
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities - accounts payable and accrued expenses $ 131,203
Other non-current liabilities - asset
retirement obligations 6,646
------------
TOTAL LIABILITIES 137,849
------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,048,331 shares issued and outstanding 170,483
Additional paid in capital 22,273,661
Retained deficit (3,461,344)
-----------
Total stockholders' equity 18,982,800
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,120,649
===========
See summary of significant accounting policies and notes to
financial statements.
F-2
WESTSIDE ENERGY CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
2004 2003
---------- ----------
Revenues
Oil and Gas Sales $ 116,137 $ -
---------- ----------
Total Revenues 116,137 -
Expenses
General and administrative expense 745,956 3,686
Interest expense 141,983 1,341
Depreciation, depletion, and amortization 97,965 -
Impairment 268,962 -
---------- ----------
Total Expenses 1,254,865 5,027
---------- ----------
Loss from Operations (1,138,728) (5,027)
---------- ----------
Other Revenues
Interest Income 50,704 -
Other Income 51,265 -
---------- ----------
Total Other Revenues 101,969 -
---------- ----------
NET LOSS $(1,036,759) $ (5,027)
=========== ==========
Basic and diluted loss per common share $ (0.18) $ (0.00)
Weighted average common shares outstanding 5,607,215 1,156,998
See summary of significant accounting policies and notes to
financial statements.
F-3
WESTSIDE ENERGY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2003 and 2004
Common Stock Retained
Shares Amount Deficit Totals
-------- ---------- ----------- ---------
Balances at December 31, 2002 1,153,970 $2,352,748 $(2,419,559) $ (66,811)
Stock issued for services 5,000 1,900 1,900
Imputed interest 1,341 1,341
Share adjustment (1,139)
Net loss (5,027) (5,027)
---------- --------- ---------------------
Balances at December 31, 2003 1,157,831 2,355,989 (2,424,585) (68,596)
Imputed interest 1,220 1,220
Discount on notes payable 119,051 119,051
Stock issued for cash 14,851,000 19,369,490 19,369,490
Stock issued for properties 700,000 20,619 20,619
Stock issued for fundraising 10,000 - -
Stock issued for property costs 30,000 43,500 43,500
Stock issued for services 149,500 234,275 234,275
Stock issued for debt 150,000 300,000 300,000
Net Loss (1,036,759) (1,036,759)
---------- --------- ----------- ----------
Balances at December 31, 2004 17,048,331 22,444,144 $(3,461,344) $18,982,800
========== =========== ===========
Less: par 170,483
-----------
Additional paid in capital $22,273,661
===========
See summary of significant accounting policies and notes to
financial statements.
F-4
WESTSIDE ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
2004 2003
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,036,759) $ (5,027)
Adjustments to reconcile net loss to net
cash used in operating activities:
Impairment 268,962 -
Stock issued for services 234,275 -
Amortization of discount on N/P 119,051 -
Depreciation, depletion, and amortization 97,965 -
Imputed interest 1,220 1,341
Changes in:
Accounts payable and accrued expenses 79,938 ( 2,000)
Prepaid expenses (30,468) -
Accounts receivable (114,934) -
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (380,749) (3,786)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (25,909) -
Purchase of oil and gas interests (3,249,809) -
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (3,275,718) -
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock for cash 19,369,490 -
Proceeds from notes issued to related parties 810,000 -
Proceeds from notes 300,000 -
Advances from shareholder - 3,750
Payments on advances from shareholder (17,720) -
Payments on notes to related parties (810,000) -
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,651,770 3,750
----------- ---------
NET CHANGE IN CASH 15,995,303 ( 36)
CASH BALANCES
-Beginning of period 388 424
----------- ---------
-End of period $15,995,691 $ 388
=========== =========
SUPPLEMENTAL DISCLOSURES
Stock issued for oil and gas interest $ 64,119 $ -
Debt converted to common stock 300,000 -
Recognition of asset retirement obligation 6,532 -
Discount on notes payable 119,051 -
See summary of significant accounting policies and notes to
financial statements.
F-5
WESTSIDE ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations and organization
Westside Energy Corporation ("Westside") (formerly EvenTemp Corporation) was
incorporated in Nevada on November 30, 1995. EvenTemp operated an auto repair
and accessory business. This business ceased operating in August 1999. The name
of the company was changed to Westside Energy Corporation in March 2004.
Westside is engaged primarily in the acquisition, development, production,
exploration for, and the sale of, oil, gas and natural gas liquids. Westside
sells its oil and gas products primarily to domestic pipelines and refineries.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Westside records oil and gas revenues following the entitlement method of
accounting for production, in which any excess amount received above Westside's
share is treated as a liability. If less than Westside's share is received, the
underproduction is recorded as an asset. Westside did not have an imbalance
position in terms of volumes or values at December 31, 2004.
Oil and gas properties
Westside uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, to
drill and equip development wells and related asset retirement costs are
capitalized. Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on Westside's experience of successful drilling
and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated residual salvage values, are depreciated
and depleted by the unit-of-production method.* Support equipment and other
property and equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
F-6
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
Through December 31, 2004, Westside had one producing well. All revenues from
Westside were from a single operator of this well.
Cash and cash equivalents
Cash and cash equivalents include cash in banks and certificates of deposit
which mature in within three months of the date of purchase.
Other property and equipment
Property and equipment is valued at cost. Additions are capitalized and
maintenance and repairs are charged to expense as incurred. Gains and losses on
dispositions of equipment are reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which are three to seven years.
Long-lived assets
Long lived assets to be held and used or disposed of other than by sale are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used or disposed of other than by sale are
recognized based on the fair value of the asset. Long-lived assets to be
disposed of by sale are reported at the lower of its carrying amount or fair
value less cost to sell.
Stock-Based Compensation
Westside had no stock-based compensation to employees through December 31, 2004.
Subsequent to 2004, Westside began issuing common stock to employees for
compensation. Westside will record as compensation expense the fair value of
such shares as calculated pursuant to Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), recognized
over the related service period. Westside has no option plans for its employees.
Westside accounts for stock-based compensation issued to non-employees in
accordance with the provisions of SFAS No. 123 and EITF No. 96-18, "Accounting
for Equity Investments That Are Issued to Non-Employees for Acquiring, or in
Conjunction with Selling Goods or Services." Common stock issued to
non-employees and consultants is based upon the fair value of the services
received or the fair value of the equity instruments issued whichever value is
more reliably measurable.
Income taxes
Westside recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to be recovered. Westside provides a valuation
allowance for deferred tax assets for which it does not consider realization of
such assets to be more likely than not.
Loss per share
Basic and diluted net loss per share calculations are presented in accordance
with Financial Accounting Standards Statement 128, and are calculated on the
basis of the weighted average number of common shares outstanding during the
year. They include the dilutive effect of common stock equivalents in years with
net income. Basic and diluted loss per share is the same due to the absence of
common stock equivalents.
F-7
New Accounting Standards
In 2001, the FASB issued FASB Statement No. 143, "Accounting for Asset
Retirement Obligations". This Statement requires that the fair value of an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The present value of the
estimated asset retirement costs is capitalized as part of the carrying amount
of the long-lived asset. For Westside, asset retirement obligations primarily
relate to the abandonment of oil and gas producing facilities. Under previous
accounting standards, such obligations were recognized over the life of the
producing assets on a units-of-production basis.
The amounts recognized are based upon numerous estimates and assumptions,
including future retirement costs, future recoverable quantities of oil and gas,
future inflation rates and the credit-adjusted risk-free interest rate.
Previous accounting standards used the units-of-production method to match
estimated future retirement costs with revenues generated from the producing
assets. In contrast, FASB Statement No. 143 requires depreciation of the
capitalized asset retirement cost and accretion of the asset retirement
obligation over time. The depreciation will generally be determined on a
straight line basis, while the accretion to be recognized will escalate over the
life of the producing assets, typically as production declines. The following
table indicates the changes to Westside's before-tax asset retirement
obligations in 2004:
Balance at December 31, 2003 $ -
Liabilities incurred 6,532
Accretion expense 114
----------
Balance at December 31, 2004 $6,646
==========
In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation" SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this new accounting pronouncement is
not currently expected to have a material impact on the financial statements of
the Company during the calendar year 2006.
NOTE 2 - CONCENTRATION OF CREDIT RISK
At December 31, 2004, Westside's cash in financial institutions exceeded the
federally insured deposits limit by $15,895,691. An investment of $15,884,420 in
a reverse repurchase agreement is included in cash and cash equivalents at
December 31, 2004. The collateral for this investment consisted of a
collateralized mortgage obligation with a market value of approximately
$16,209,641 at December 31, 2004.
NOTE 3 -- RELATED PARTY TRANSACTIONS
For the year ended December 31, 2004, Westside borrowed a total of $810,000 from
related parties on six notes.
Two of the notes totaling $410,000 bore 10% interest, were collateralized by
Westside's oil and gas interests, and were issued with a combined 820,000
warrants exercisable at $.50 each. These notes were discounted by $119,051 for
the relative fair value of the warrants. As of December 31, 2004, the notes have
been paid in full and the entire discount has been amortized.
F-8
The remaining notes bore 10% interest and were convertible into common stock at
$2 per share. The entire balance was paid in full in October 2004.
NOTE 4 -- NOTES PAYABLE
In September 2004, Westside borrowed $300,000 from a third party. The note bore
10% interest and was convertible into common stock at $2 per share. During the
fourth quarter of 2004, this debt was converted into 150,000 shares of common
stock.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Westside is not currently involved in any pending legal proceeding. In the
future, Westside may become involved in various legal proceedings from time to
time, either as a plaintiff or as a defendant, and either in or outside the
normal course of business. Westside is not now in a position to determine when
(if ever) such a legal proceeding may arise. If Westside ever becomes involved
in a legal proceeding, Westside's financial condition, operations, or cash flows
could be materially adversely affected, depending on the facts and circumstances
relating to such proceeding.
In March 2005, Westside entered into a 38-month lease agreement, with the first
two months free, for $3,660 per month.
NOTE 6 -- INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2004 and
2003, are as follows:
Federal income taxes: 2004 2003
Current $ - $ -
Deferred 474,974 11,774
Less: Valuation allowance (474,974) (11,774)
---------- --------
Total $ - $ -
=========== ========
Westside has prior net operating loss carryforwards of approximately $1,445,049
and $41,917 for the years ended December 31, 2004 and 2003 respectively.
Available carryforwards expire 15 to 20 years from when incurred.
NOTE 7 -- IMPAIRMENT OF LONG-LIVED ASSETS
Pursuant to FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, an impairment loss of $268,962 has been recognized for the
Lucille Pruitt #1 well and included in income from continuing operations before
income taxes under the caption "Impairment." In calculating the impairment loss,
fair value was determined by the discounted present value minus the carrying
value at December 31, 2004.
NOTE 8 -- COMMON STOCK
During the first quarter of 2004, Westside sold an aggregate of 4,080,000 shares
of common stock to one of its directors and to an entity under the control of
its other director for $.01 per share for total proceeds of $40,800.
During the second quarter of 2004, Westside sold 385,500 units consisting of two
shares of common stock and one warrant to purchase common stock with a per share
exercise price of $2.50, for cash of $2.00 per unit for total proceeds of
$771,000.
F-9
During the third quarter of 2004, Westside issued 149,500 shares of common stock
for services valued at $234,275. Westside issued 30,000 shares of common stock
valued at $43,500 for costs related to purchasing the Oil and Gas Properties.
During the fourth quarter of 2004, Westside completed an equity offering
consisting of 10,000,000 shares of common stock with an offer price of $2.00 per
share. The cash offering resulted $20,000,000 in gross proceeds. Westside's
placement agent received $1,400,000 and 300,000 warrants with a purchase price
of $2.00 per share and a term of 5 years.
As discussed in note 4, a $300,000 note was converted at $2 per share in
November 2004 resulting in the issuance of 150,000 shares.
NOTE 9 -- WARRANTS
During the year ended December 31, 2004, Westside issued warrants attached to
debt, stock purchases, and for consulting services. All issuances are approved
by the board of directors.
There were no warrants issued or outstanding until the year ended December 31,
2004. A summary of changes in outstanding warrants is as follows:
Weighted Average
Warrants Share Price
-------------- -----------
Outstanding at December 31, 2003 - -
Changes during the year:
Granted 1,510,500 $ 1.31
Exercised - -
Forfeited - -
-------------- ---------
Outstanding at December 31, 2004 1,510,500 $ 1.31
============== =========
Warrants outstanding and exercisable as of December 31, 2004:
- - Outstanding - - Exercisable
Number Remaining Number
Exercise Price of Shares life of Shares
-------------- ---------- -------- ----------
$ .50 820,000 4.2 years 820,000
2.00 300,000 4.8 years 300,000
2.50 390,500 1.4 years 390,500
---------- -------
1,510,500 1,510,500
========== =========
Westside has determined, based upon a Black-Scholes model, that the fair value
of the warrants on the date of grant was approximately $1,848,000, using an
expected life of two to five years, volatility of 131% and a risk-free interest
rate of 2.0%.
NOTE 10 -- SUBSEQUENT EVENTS
In February 2005, 33,000 warrants were exercised at a price of $2.50 each
resulting in the issuance of 33,000 shares of common stock for a total of
$82,500.
F-10
Westside Energy Corporation
Supplemental Information (Unaudited)
Year Ended December 31, 2004
Westside began oil and gas operation in 2004, therefore, there is no comparative
data for the year ending December 31, 2003.
Capitalized Costs Relating to Oil and Gas Producing
Activities at December 31, 2004
Unproved oil and gas properties $2,610,492
Proved oil and gas properties 709,968
-----------
3,320,460
Less accumulated depreciation, depletion, amortization,
and impairment 366,813
-----------
Net capitalized costs $2,953,647
===========
Costs Incurred in Oil and Gas Producing Activities
for the Year Ended December 31, 2004
Property acquisition costs
Proved $ 49,655
Unproved 2,610,492
Exploration and Development costs 653,781
Results of Operations for Oil and Gas Producing
Activities for the year ended December 31, 2004
Oil and gas sales $ 116,137
Depreciation, depletion, and amortization (97,965)
Impairment expense (268,962)
----------
(250,790)
Income tax expense -
Results of operations for oil and gas producing
activities (excluding corporate overhead and
financing costs) $ (250,790)
==========
The following estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available. All of the Company's reserves
are located in the United States.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
F-11
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent a
year to reflect the estimated timing of the future cash flows.
There are no proved undeveloped reserves.
Oil (Bbls) Gas (Mcf)
Proved developed reserves
Beginning of year 2,333 104,594
Production (654) (13,805)
--------- --------
End of year 1,679 90,789
========= ========
Standardized measure of discounted future net
cash flows at December 31, 2004
Future cash inflows $ 554,400
Future production costs (140,400)
Future tax expense (57,600)
---------
Future net cash flows 356,400
10% annual discount for
estimated timing of cash flows (62,900)
---------
Standardized measure of discounted
future net cash flows relating to proved
oil and gas reserves $ 293,500
=========
The following reconciles the change in the standardized measure of discounted
future net cash flow during 2004.
Beginning of year $ -
Sales of oil and gas produced, net of
production costs (116,137)
Net change from purchases and sales of
minerals in place 409,637
---------
End of year $ 293,500
=========
F-12
WESTSIDE ENERGY CORPORATION
BALANCE SHEET
September 30, 2005
(unaudited)
ASSETS
Current Assets
Cash $ 6,012,777
Certificate of deposit 25,000
Marketable securities 3,450,000
Accounts receivable 190,085
Prepaid assets 55,786
-----------
Total current assets 9,733,648
Oil & gas properties, using
successful efforts accounting
Proved properties 3,683,210
Unproved properties 5,884,366
Accumulated depreciation, depletion,
amortization, & impairment (657,372)
-------------
Net oil & gas properties 8,910,204
Office furniture & equipment, net of
accumulated depreciation of $34,887 16,528
------------
TOTAL ASSETS $ 18,660,380
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities-accounts payable and
accrued expenses $ 763,417
Non-current liabilities-asset
retirement obligations 13,940
-----------
TOTAL LIABILITIES 777,357
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding
Common Stock, $.01 par value, 50,000,000 shares
authorized, 17,376,245 shares issued and outstanding 173,762
Additional paid-in capital 22,911,472
Retained deficit (4,989,067)
Deferred compensation (213,046)
Other comprehensive loss (98)
-----------
TOTAL STOCKHOLDERS' EQUITY 17,883,023
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,660,380
===========
G-1
WESTSIDE ENERGY CORPORATION
STATEMENT OF INCOME
Three and Nine Months Ended September 30, 2005 and 2004
(unaudited)
Three Months Nine Months
2005 2004 2005 2004
---------- ---------- --------- ----------
Revenues
Oil and gas sales $ 78,525 $ - $ 199,746 $ -
---------- ---------- --------- ---------
Total Revenues 78,525 - 199,746 -
Expenses
Production costs 14,973 - 62,828 -
Exploration expense 13,383 - 351,010 -
General and
administrative expense 410,682 361,129 1,243,440 516,376
Depreciation, depletion,
and amortization 45,499 - 140,544 -
Impairment - - 185,335 -
Interest expense - 45,390 - 72,838
---------- ---------- ---------- ----------
Total Expenses 484,537 406,519 1,983,157 589,214
---------- ---------- ---------- ----------
Loss from Operations (406,012) (406,519) (1,783,411) (589,214)
---------- ---------- ---------- ----------
Other Revenues
Interest income 85,934 524 255,689 2,024
---------- ---------- ---------- ----------
NET LOSS $ (320,078) $ (405,995) $(1,527,722) $(587,190)
========== ========== ========== ==========
Basic and diluted loss
per common share $ (.02) $ (.06) $ (.09) $ (.11)
Weighted average common
shares outstanding 17,376,165 6,898,331 17,245,220 5,254,667
G-2
WESTSIDE ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 and 2004
(unaudited)
2005 2004
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,527,722) $ (587,190)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock issued for services 205,164 234,275
Impairment 185,335 -
Depreciation, depletion and amortization 140,544 -
Imputed interest - 1,063
Amortization of discount on note payable - 53,667
Changes in:
Accounts receivable (69,040) -
Prepaid assets (25,318) -
Accounts payable and accrued expenses 632,213 23,789
Advances from joint venture partners - 36,499
---------- --------
NET CASH USED IN OPERATING ACTIVITIES (458,824) (237,897)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (3,575,098) -
Proceeds from sale of marketable securities 125,000 -
Purchase of certificate of deposit (25,000) -
Purchase of office equipment (25,506) -
Capital expenditures for oil and gas
properties (6,246,365) (1,326,204)
---------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,746,969) (1,326,204)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to
related parties - 610,000
Proceeds from notes payable - 300,000
Payments for fundraising (2,121) -
Proceeds from sale of common stock 225,000 811,799
---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 222,879 1,721,799
---------- --------
NET CHANGE IN CASH (9,982,914) 157,698
CASH BALANCES
-Beginning of period 15,995,691 388
---------- --------
-End of period $ 6,012,777 $ 158,086
========== ========
NON-CASH DISCLOSURES:
Stock issued for oil and gas interests $ - $ 64,119
Discount on note payable - 119,051
Unrealized loss on marketable securities (98) -
Stock issued for deferred compensation 291,480 -
G-3
WESTSIDE ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Westside Energy
Corporation ("Westside"), have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules of
the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
Westside's latest annual report filed with the SEC on Form 10-KSB/A. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for fiscal year 2004, as reported
in the 10-KSB/A, have been omitted.
NOTE 2 - CONCENTRATION OF RISK
At September 30, 2005, Westside's cash in financial institutions exceeded the
federally insured deposits limit by $5,912,777. An investment of $4,571,161 in a
reverse repurchase agreement is included in cash and cash equivalents at
September 30, 2005. The collateral for this investment consisted of a
collateralized mortgage obligation with a market value of approximately
$4,669,481.
NOTE 3 - MARKETABLE SECURITIES
The marketable securities are deemed by management to be "available-for-sale"
and, accordingly, are reported at fair value, with unrealized gains and losses
reported in other comprehensive income and reflected as a separate component
within stockholders' equity. Realized gains and losses on securities
available-for-sale are included in other income/expense and, when applicable,
are reported as a reclassification adjustment, net of tax, in other
comprehensive income. Gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method. These
marketable securities have a fair value of $3,450,000 at September 30, 2005.
NOTE 4 - EQUITY
During the first nine months ended September 30, 2005:
218,000 warrants were exercised at an average price of $1.03 each, for a
total of $225,000.
31,666 shares valued at $123,331 were issued to employees. 7,222 shares
vested immediately; the remaining shares vest over a two year period from grant
date. As of September 30, 2005, $49,283 has been expensed. The remaining amount
of $74,048 is deferred compensation, and will be amortized evenly over the
remainder of the vesting period.
40,000 shares valued at $140,000 were issued to contractors for services.
13,334 shares vested immediately; the remaining shares vest over a two year
period from grant date. As of September 30, 2005, $77,737 has been expensed.
The remaining amount of $62,263 is deferred compensation, and will be amortized
over the remainder of the vesting period.
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37,998 shares valued at $153,892 were issued to directors for services.
12,666 shares vested immediately; the remaining shares vest over a two year
period from grant date. As of September 30, 2005, $77,157 has been expensed. The
remaining amount of $76,735 is deferred compensation, and will be amortized over
a two year period from grant date.
Beginning in July 2005, Westside agreed to pay a contractor 250 shares per
month for services. As of September 30, 2005, 250 shares valued at $987 were
issued and 500 shares valued at $1,748 are classified as accounts payable.
NOTE 5 - COMPREHENSIVE LOSS
Comprehensive loss is composed of net loss and other comprehensive income
(loss), which includes the change in unrealized gain and losses on
available-for-sale securities. The following table outlines the changes in other
comprehensive loss for the nine months ended September 30, 2005 and 2004:
2005 2004
---------- ----------
Net Loss $ (1,527,722) $ (587,190)
Other Comprehensive Loss
Unrealized loss on marketable
securities (98) -
---------- ----------
Comprehensive Loss $ (1,527,820) $ (587,190)
========== ==========
NOTE 6 - COMMITMENT
On April 18, 2005, the Company entered into an agreement with EBS Oil and Gas
Partners Production Company, L.P. ("EBS"), a privately held entity engaged in
the drilling and completion of wells on various oil and gas leases covering
lands located in Cooke, Montague, and Wise Counties, Texas. Under the terms of
the EBS Agreement, the Company will make available to EBS, on a revolving basis,
funds of up to a maximum sum of $1,000,000 outstanding at any given time. The
funds will be advanced to cover the costs incurred by EBS in connection with its
acquisition of oil and gas leases. The Company will have the discretion as to
whether or not to make any advances with respect to any particular leases
presented by EBS for financing pursuant to the EBS Agreement.
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